COMMISSION STAFF WORKING DOCUMENT Country Report Bulgaria 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-28
Institutions: European Commission, Secretariat-General
Subjects: Bulgaria, EU employment policy, EU investment, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 28.2.2017  SWD(2017) 68 final/3   CORRIGENDUM  This document corrects SWD(2017) 68 final/2 linked to COM(2017) 90 final of 22.2.2017. Concerns the EN and BG language versions. Corrections on pages 1 and 11.   The text shall read as follows:  COMMISSION STAFF WORKING DOCUMENT Country Report Bulgaria 2017 Including an In-Depth Review on the prevention and correction of macroeconomic  imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP  2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011   {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}   
 
 
CONTENTS 

Executive summary 

1. 

Economic situation and outlook 

2. 

Progress with country-specific recommendations 

3. 

Summary of the main findings from the MIP in-depth review 

4. 

Reform priorities 

4.1.  Public finances and taxation 

4.2. 

Financial sector 

4.3. 

Labour market, education, health and social policies 

4.4. 

Investment 

4.5. 

Sectoral policies 

4.6.  Public administration 

A.  Overview table 

B.  MIP Scoreboard 

C. 

Standard Tables 

References 

1 

4 

11 

15 

20 

20 

22 

29 

36 

43 

45 

47 

54 

55 

60 

 
 
 
LIST OF TABLES 

1.1. 

2.1. 

Key economic, financial and social indicators 

Summary Table on 2016 CSR assessment 

3.1.  MIP Assessment matrix 

4.1.1. 

Impact of measures to improve tax collection in 2016 

B.1.  MIP scoreboard indicators 

C.1. 

Financial market indicators 

C.2. 

Labour market and social indicators 

C.3. 

Labour market and social indicators (continued) 

C.4. 

Product market performance and policy indicators 

C.5.  Green growth 

LIST OF GRAPHS 

1.1. 

1.2. 

1.3. 

1.4. 

1.5. 

1.6. 

1.7. 

1.8. 

1.9. 

Real GDP growth by demand components 

GDP per capita relative to peers and EU28 

HICP, GDP deflator and producer price index (PPI) 

Activity, employment and unemployment rates (quarterly, seasonally adjusted) 

Population dynamics 

GDP per capita in PPS in 2015 vs income quintile ratio (S80/S20) for the EU-countries 

Current account developments 

Net international investment position 

Private sector banking credit flow, 12-month moving sums 

1.10. 

Public deficit reduction breakdown, 2016 vs 2015, in bn EUR 

1.11. 

SOE liabilities as % of GDP per supervising ministry 

4.1.1. 

Tax revenue main components 

4.1.2. 

Level of income inequality in EU Member States 

4.2.1.  Post-AQR capital adequacy, % of risk-weighted assets 

4.2.2.  Bank-by-bankCET1 capital adequacy ratios in 2018 according to stress test scenarios 

4.2.3. 

Impact of baseline and adverse scenario of stress tests on capital 

4.2.4.  Private debt breakdown 

4.2.5. 

Interest coverage, distribution by sector, 2015 

4.3.1.  Employment by sector, year-on-year changes 

4.3.2.  Relative dispersion of employment rates by education level, 2010, 2014 and 2015 

4.3.3. 

Increasing distance from the labour market * 

4.3.4. 

Long-term unemployment rate by educational attainment 

4.3.5.  At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI) 

4.3.6.  Reduction in the risk of poverty after social transfers (excluding pensions) 

4.4.1.  Decomposition of Unit Labour Costs (ULC) 

4.4.2.  ULC-based REER in Bulgaria and EU 

4.4.3.  Bulgaria’s Export Market Shares (EMS) 

10 

13 

18 

21 

54 

55 

56 

57 

58 

59 

4 

4 

5 

5 

6 

6 

7 

7 

8 

9 

9 

20 

21 

23 

23 

24 

26 

28 

29 

30 

30 

31 

32 

33 

36 

36 

37 

 
 
 
4.4.4.  Dynamism and Competitiveness of Exports (goods) on top-10 country destinations 

4.4.5.  Public and private investment 

4.4.6.  Public investment and quality of infrastructure 

4.4.7.  Worldwide governance indicators 

4.4.8.  Doing Business 2017, distance to frontier 

4.4.9.  Global Entrepreneurship Monitor 

4.5.1.  R&D expenditure (GERD) by sector of performance and source of funds, 2014 

LIST OF BOXES 

2.1. 

Contribution of the EU budget to structural change in Bulgaria 

4.4.1. 

Investment challenges and reforms in Bulgaria 

37 

37 

38 

38 

39 

41 

43 

14 

40 

 
 
 
 
EXECUTIVE SUMMARY 

This  report  assesses  Bulgariaʼs  economy  in  the 
light  of 
the  European  Commission's  Annual 
Growth  Survey  published  on  16  November  2016. 
In  the  survey,  the  Commission  calls  on  EU 
Member  States  to  redouble  their  efforts  on  the 
three elements of the virtuous triangle of economic 
policy  –  boosting  investment,  pursuing  structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should  put  the  focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
the 
inclusive  growth.  At 
the 
Commission  published 
the  Alert  Mechanism 
Report (AMR) that initiated the sixth round of the 
macroeconomic  imbalance  procedure.  The  in-
depth  review,  which  the  2017  AMR  concluded 
should  be  undertaken  for  the  Bulgarian  economy, 
is presented in this report. 

same 

time, 

Economic  performance  has 
strengthened. 
Private  consumption  was  the  key  driver  for  GDP 
growth  of  3.6 %  in  2015  and  expected  3.3 %  in 
2016. While the export performance was robust in 
2016, the contribution of net exports to growth for 
2017  is  projected  to  sharply  drop  due  to  strong 
imports brought about by rising domestic demand. 
Investment,  subdued  in  2016,  is  expected  to  gain 
momentum in  2017 with the pick-up of EU funds 
implementation. Income convergence with the EU 
continues,  but  the  relative  position  against  peers 
remains unchanged. In the medium term, relatively 
low potential growth constrains Bulgaria’s income 
convergence.  In  addition,  income  inequality  has 
been rising fast and is now at very high levels. 

Fiscal  consolidation  has  moved  faster  than 
planned.  The  budget  deficit  is  estimated  to  have 
decreased  to  0.4 %  of  GDP  in  2016  and  to 
continue  on  a  declining  path  in  2017  and  2018. 
The  structural  deficit  is  forecast  to  stay  below 
0.5 %  of  GDP  throughout  the  period  2016-2018. 
Contingent  liabilities  of  state-owned  enterprises 
(SOEs)  are  the  main  source  of  risk  to  the  fiscal 
outlook. Public debt is projected to decrease again 
from  2017  onwards  after  a  temporary  increase  in 
2016. 

While labour market conditions have improved, 
challenges  remain.  The  unemployment  rate  is 
expected to fall further to 7.1 % in 2017 (from 7.7 
%  in  2016),  well  below  the  EU  average,  while 
rapid  wage  growth  does  not  seem  so  far  to  have 
had a negative impact on competitiveness. Adverse 
structural 
demographic 

developments 

and 

as 

the 

such 

problems 
long-term 
unemployment,  high  inactivity  levels,  and  limited 
inclusion of young people are key impediments to 
the functioning of the labour market.  

high 

The  financial  sector  shows  positive  trends 
despite  remaining  balance  sheet  weaknesses. 
Headline  indicators  of  the  banking  sector  have 
improved  since  the  market  tensions  of  2014. 
Private  sector  lending  is  showing  signs  of  a 
nascent  recovery,  in  particular  for  households. 
However, despite the positive trends on aggregate, 
the  asset  quality  review  and  stress  tests  revealed 
weaknesses in parts of the sector which remain to 
be addressed. 

the 

Overall, Bulgaria has made some (1) progress in 
addressing 
country-specific 
2016 
recommendations.  The  government  has  made 
substantial progress in finalising the balance-sheet 
review  and  stress  test  of  the  insurance  companies 
and  the  review  of  private  pension  funds’  assets. 
Some  progress  has  been  made  in  improving  tax 
collection  and  reducing  the  extent  of  the  informal 
economy,  finalising  the  asset  quality  review  and 
stress test of the banks, reinforcing and integrating 
social assistance and active labour market policies 
and  in  improving  public  procurement.  Limited 
progress  has  been  achieved  regarding  follow-up 
actions  in  the  financial  sector  and  improving 
banking  and  non-banking  supervision,  increasing 
the 
for 
disadvantaged groups, improving the efficiency of 
the  health  system,  in  establishing  guidelines  and 
criteria  for  setting  the  minimum  wage,  increasing 
the  coverage  and  adequacy  of  the  minimum 
income  scheme  and  reforming  the  insolvency 
framework.  

education 

provision 

quality 

of 

Regarding  the  progress  in  reaching  the  national 
targets  under  the  Europe  2020  strategy,  Bulgaria 
appears  to  be  already  well  ahead  in  reaching  its 
targets for reducing greenhouse gas emissions and 
increasing 
renewable  energy. 
Measures  have  been  taken  to  improve  energy 
efficiency  but  energy  consumption  has  further 
deviated  from 
target. 
Bulgaria  has  made  progress  on  the  employment 
rate  and  tertiary  education  but  the  Europe  2020 

indicative  national 

share  of 

the 

the 

(1)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the Overview Table in the Annex.  

1 

 
 
                                                           
Executive summary 

targets  are  still  to  be  met.  However,  the  situation 
has  deteriorated  regarding  the  targets  on  early 
school leaving and poverty reduction. 

findings  of 

The  main 
review 
contained  in  this  report  and  the  related  policy 
challenges are as follows:  

in-depth 

the 

While the robustness of the banking sector has 
increased  on  aggregate,  some  pockets  of 
vulnerabilities  pose  risks  to  the  system  as  a 
whole.  Capital  adequacy,  risk  coverage  and 
liquidity  have  improved  and  the  asset  quality 
review  and  stress  tests  showed  robust  results  on 
aggregate. Nevertheless, some institutions warrant 
close  attention,  including  one  systemic  bank. 
Tackling  hard-to-value  assets  and  unsound 
business  practices,  including  related-party  and 
connected  lending,  remain  key  challenges  for  the 
authorities. 

Some vulnerabilities were also confirmed in the 
insurance  and  pension  fund  sectors  and  their 
supervision.  The  independent  reviews  in  the  two 
sectors show they are overall stable. Nevertheless, 
weaknesses  in  certain  insurance  undertakings  and 
groups  were  found.  Accordingly,  a  first  round  of 
follow-up actions was requested by the supervisor. 
Further  risks  identified  in  the  reviews,  including 
related-party  investments,  cross-ownership  and 
certain 
key 
challenges  for  the  authorities.  In  addition,  the 
review did not fully assess the group-level strength 
of  certain  insurance  undertakings,  causing  further 
uncertainties to be tackled by the supervisor. 

reinsurance 

contracts, 

remain 

Despite  the  ongoing  deleveraging,  high  private 
debt,  the  majority  comprising  loans  to  non-
financial corporates, continues to be a concern. 
Bulgaria’s  high  corporate  debt  can  negatively 
weigh  on  medium-term  growth  prospects. 
Reducing the high level corporate indebtedness has 
been  constrained  by  the  delayed  adoption  of  the 
insolvency  reforms  and  the  lack  of  a  deep market 
for sales of corporate non-performing loans.  

Remaining  weaknesses  in  the  labour  market 
continue  to  hinder  growth. While  labour  market 
is  unused 
indicators  are 
rate  of 
employment  potential  with  a  high 
inactivity,  long-term  unemployment  and  young 
people  not  in  employment,  education  or  training. 
Active labour market policies for these groups are 

improving, 

there 

insufficiently  targeted.  Moreover,  the  persistently 
high  share  of  undeclared  work  distorts  the  labour 
market  and  reduces  fiscal  revenue.  The  lack  of  a 
mechanism  for  determining  the  minimum  wage 
raises economic uncertainty. Labour mismatches in 
skills,  sectors  and  regions  as  well  as  the  high 
impact  of  parenthood  on  female  employment 
(partly  relating  to  low  provision  of  childcare) 
represent 
addition, 
insufficient  provision  of  quality  education,  low 
participation 
learning,  and  social 
disparities pose challenges. The number of Centres 
is 
for  Employment  and  Social  Assistance 
increasing, but the effective integration of services 
is still limited. 

challenges. 

lifelong 

further 

In 

in 

Other key structural issues analysed in this report, 
which point to particular challenges for Bulgaria’s 
economy, are the following: 

Maintaining and enhancing the efforts to tackle 
the  shadow  economy  remains  a  key  challenge. 
Tax  collection,  especially  of  indirect  taxes,  has 
improved  since  2015.  However, 
the  shadow 
economy  and  undeclared  work  remain  high.  In 
addition,  the  tax-related  administrative  burden 
remains  elevated,  while  measures  to  improve  tax 
administration are still limited.  

lower 

socio-economic 

The  education  system  does  not  fully  equip 
students  with  relevant  skills,  and  access  to 
quality  education  is  unequal.  The  proportion  of 
in  reading,  mathematics  and 
under-achievers 
science,  as  measured  by  PISA  2015,  remains  one 
of  highest  in  the  EU.  Although  funding  for 
education  is  gradually  increasing,  it  remains  low 
compared  with  the  rest  of  the  EU.  Children  from 
status, 
families  with 
particularly  Roma  families,  do  not  enjoy  equal 
educational  opportunities, 
in  early 
childhood.  This  has  longer-term  implications  for 
their social inclusion and employability. However, 
a  major  educational  reform  has  started  with  the 
implementation  of  the  Pre-School  and  School 
Education  Act.  Vocational  education  and  training 
is  being  reformed  but  its  quality  as  well  as 
cooperation  with  business  and  social  partners  are 
insufficient.  Performance-based  funding  in  higher 
education  seeks  to  improve  quality  and  labour 
market relevance. 

including 

Key challenges in the healthcare system include 
limited  accessibility,  low  funding,  professionals 

2 

 
 
Executive summary 

government  measures  is  still  lagging  behind. 
Although  Bulgaria  has  transposed  most  EU  rules, 
the  existing  weaknesses  of  public  procurement 
practices hamper the efficiency of public spending. 

emigrating  and  weak  health  outcomes.  In 
particular,  public  health  care  spending  is  low 
compared to the EU average, though it is a priority 
in the 2017 budget. The health insurance coverage 
remains  low  and  access  to  healthcare  is  further 
impeded by out-of-pocket payments. Furthermore, 
the number of doctors emigrating each year equals 
almost  90 %  of  the  number  of  medical  graduates. 
The  shortage  of  nurses  compounds  the  human 
capital challenge. 

The  high  share  of  people  living  at-risk-of-
poverty  or  social  exclusion  remains  a  major 
economic  and  social  challenge.  The  social 
protection system, including the general minimum 
income  which  does  not  have  a 
transparent 
adjusting  mechanism,  does  not  provide  adequate 
levels  of  support.  The  activation  of  people  on 
social  benefits  remains  low.  The  high-risk  groups 
include children, the elderly, the Roma and people 
in  rural  areas.  The  fragmentation  of  the  relevant 
support agencies continues to prevent an effective 
co-ordinated response to this challenge.  

insolvency  framework  are 
Reforms  of  the 
lagging  behind.  Legislative  changes  aimed  at 
improving  the  insolvency  framework  have  only 
recently been adopted. Implementation challenges, 
including  the  qualification  and  training  of  judges 
and the capacity of courts remain to be addressed. 

Despite  some  improvements,  challenges  in  the 
business  environment  continue  to  weigh  on 
investment.  The  perception  of  corruption,  weak 
institutions  and  an  unstable 
legal  framework 
remains a cause of concern in this regard. The low 
trust  in  the  judicial  system  and  public  institutions 
hinders private investment. To further improve the 
business  environment,  correctly  implementing  the 
newly-introduced 
the 
action  plan  for  removing  obstacles  to  investment 
remain  key.  The  Small  Business  Act  reforms  are 
falling  behind.  Access  to  finance  for  small  and 
medium-sized  enterprises  remains  inadequate  but 
is  expected 
improve  with  new  financial 
instruments.  

impact  assessment  and 

to 

slow 

reforms 

administrative 

The 
and 
weaknesses  in  public  procurement  continue  to 
affect  the  efficiency  of  the  public  sector. 
Legislative  and  institutional  changes  are  a  step  in 
the 
systematic 
implementation  of  public  administration  and  e-

direction 

right 

but 

the 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

to  accelerate  over  the  coming  years  (Graph  1.2), 
relatively  low  potential  growth  constrains  further 
catching  up.  Structural  reforms,  higher  private 
investment rates and improvements in the business 
environment,  could,  inter  alia,  promote  faster 
convergence. 

Graph 1.2:  GDP per capita relative to peers and EU28 

GDP growth  

Recent economic performance has been robust. 
After  a  good  growth  performance  of  3.6 %  in 
2015, the economy is estimated to have grown by 
3.3 % in 2016. Growth is expected to slightly taper 
off  in  2017  and  2018,  with  2.9 %  and  2.8 %, 
respectively.  Private  consumption  was  the  key 
growth  driver  in  2016,  although  net  exports  also 
contributed  positively  (Graph  1.1).  In  2017,  a 
slightly  more  diversified  domestic  demand  will 
only  partly  compensate  for  quickly  fading  net 
exports  due  to  an  expected  increase  in  imports. 
Labour  market  conditions  have  significantly 
improved  during  the  economic  recovery  with  an 
unemployment  rate of  7.7 %  in  2016  and  forecast 
at 7.1 % in 2017. 

Graph 1.1: 

Real GDP growth by demand components 

* Purchasing power standards 
Source: European Commission 
Note: The graph shows the percentage of GDP per capita, 
adjusted for differences in price levels (PPS), vis-a-vis peer 
countries: CZ,EE,LV,LT,HU,PL,RO,SI,SK. 

Risks  to  the  growth  outlook  are  tilted  towards 
the  downside.  As  a  domestic  downside  risk,  a 
significantly slower than expected implementation 
of  EU  funds  could  dent  investment  and  growth. 
Political  uncertainty  related  to  the  upcoming 
elections  could  also  delay  consumption  and 
investment  decisions.  Given  the  openness  of  the 
economy,  weak  import  demand  from  the  main 
trading partners, especially in Europe, and surging 
oil  prices  would  pose  external  downside  risks. 
However, a faster progress with structural reforms 
could  lift  potential  and  real  growth  rates  over  the 
medium term. 

Inflation 

Inflation  is  expected  to  pick  up  on  the  back  of 
strong domestic demand and recovering energy 
prices. While annual HICP inflation was negative 
in 2016 at -1.3 %, it is expected to pick up pace to 
reach  0.8 %  in  2017,  mainly  driven  by  buoyant 
domestic  demand  as  well  as  recovering  energy 
the 
prices  (Graph  1.3).  This  would  reverse 
deflationary  trend  experienced  since  2013,  which 
was  mainly  driven  by  declining  import  prices, 

Source: European Commission 

Investment was subdued in 2016 but is expected 
to gain momentum in 2017. Investment declined 
in  2016  by  an  estimated  0.5 %,  mainly  due  to  the 
sharp  slowdown  in  EU  funds  implementation 
following  the  end  of  the  2007-2013  programming 
period.  In  contrast,  investment  is  expected  to 
exhibit a strong recovery in 2017 with a growth of 
3.2 %  amid  an  acceleration  of  projects  under  the 
new 2014-2020 programming period for EU funds. 

Income convergence with the EU continues but 
the relative position against peers is unchanged. 
While income convergence with the EU is forecast 

4 

-15-10-505101500010203040506070809101112131415161718%Changes of inventoriesInvestment (GFCF)ConsumptionNet exportsReal GDP growthforecast2030405060708000010203040506070809101112131415161718% GDP per capita in PPS* relative to EU28 (lhs)GDP per capita in PPS* relative to peers average (rhs)forecast 
 
 
 
1. Economic situation and outlook 

subdued  domestic  demand,  and  reductions  in 
administered prices. 

Graph 1.4:  Activity, employment and unemployment 

rates (quarterly, seasonally adjusted) 

Graph 1.3:  HICP, GDP deflator and producer price index 

(PPI) 

Source: European Commission 

Labour  supply  is  hindered  by  unfavourable 
demographic  developments.  The  population  is 
fast  ageing  and  decreasing  due  to  a  negative 
natural  growth  rate  and  negative  net  migration 
(Graph  1.5).  The  International  Organisation  of 
Migration  estimates 
that  14 %  of  Bulgaria’s 
citizens  are  currently  living  abroad.  Ageing  and 
emigration  have  contributed  to  labour  shortages 
(see Section 4.3). 

Source: European Commission 

Labour market, Poverty and Social Exclusion 

While the positive impact of economic growth is 
visible in the labour market, challenges remain. 
The  labour  market  continued  to  improve  in  2016. 
The  employment  rate  for  people  aged  20  to  64 
increased  from  67.1 %  in  2015  to  67.7 %  (Q1-Q3 
2016  average)  (Graph  1.4),  still  below  the  EU 
average  as  well  as  the  EU  2020  national  target. 
The unemployment rate fell from 9.2 % in 2015 to 
7.1 % in December 2016 (age group 15-74) and is 
now below the EU average of 8.2 %. In spite of the 
positive  developments,  labour  market  challenges 
remain,  in  particular  the  high  share  of  long-term 
unemployment  (59.6 %  of  total  unemployment  in 
Q1-Q3 2016) and the relatively high rate of young 
people  not  in  employment,  education  or  training 
(19.3 % in 2015).  

5 

-10-505101500020406081012141618%HICPGDP deflatorPPIforecast0510152025455055606570758000Q102Q104Q106Q108Q110Q112Q114Q116Q1% of labour force% of populationUnemployment rate 15-74 (rhs)Activity rate 20-64Employment rate 20-64 
 
 
 
1. Economic situation and outlook 

Graph 1.5: 

Population dynamics 

Source: European Commission 

Structural weaknesses in the labour market and 
the  strong  economic  recovery  have  resulted  in 
rapid wage growth. Both the cumulative increase 
of compensation per employee (21.4 %) and of the 
nominal unit labour cost (14.9 %) were among the 
highest  in  the  EU  in  2013-2015 (2).  Hence,  the 
gains 
labour  productivity  only  partially 
counterbalanced the increase in wages. In spite of 
these  developments,  pressure  on  competitiveness 
has been contained so far, as export market shares 
have moderately increased (see Section 4.4).  

in 

Poverty  and  social  exclusion  continue  to  pose 
major  challenges.  The  high  level  of  poverty 
negatively  impacts  employment,  educational  and 
health prospects. The social situation of the elderly 
deteriorated  significantly in 2015,  after  improving 
for  the  previous  5  years,  while  child  poverty 
remains high despite a declining trend (see Section 
4.3).  People  with  disabilities  face  a  higher  risk  of 
poverty  or  social  exclusion  than  anywhere  else  in 
the EU.  

Roma  face  disproportionately  high  levels  of 
poverty  and  social  exclusion.  Lower  education 
levels of Roma translate into weaker labour market 
integration and consequently higher risk of poverty 
or social exclusion than the rest of the population. 
Since over 20 % of new labour market entrants are 
Roma  (World  Bank,  2011), 
their 
educational  outcomes  and  reducing  poverty  and 

improving 

social  exclusion  would  have  significant  benefits 
for  the  wider  economy  (see  Section  4.3.2).  This 
may  be  particularly  challenging  in  the  context  of 
high  and  increasing  inequalities  given  the  strong 
relationship 
socioeconomic 
background  and  educational  performance  of 
students.  

between 

the 

Income inequality remains one of the highest in 
the EU. Despite growing GDP per capita, income 
inequality  continues  to  increase.  In  2012,  the 
income  of  the  richest  20 %  of  the  population  was 
six  times  that  of  the  poorest  20 %.  This  ratio  had 
increased  to  more  than  seven  times  in  2015. 
Bulgaria  also  has  one  of  the  highest  income 
inequalities  after 
transfers, 
suggesting  that  they  do  not  substantially  alleviate 
inequalities  (see  Section  4.1.2).  As  benefits  have 
not been regularly updated, those covered by them 
saw  their  revenues  deteriorate.  The  urban-rural 
an 
inequalities) 
divide 
additional  factor  (3).  The  fact  that  lower  income 
Member  States  appear  to  show  higher  income 
inequalities (Graph 1.6) only partially explains the 
figures for Bulgaria. 

taxes  and  social 

represents 

(spatial 

Graph 1.6:  GDP per capita in PPS in 2015 vs income 

quintile ratio (S80/S20) for the EU-countries 

Source: European Commission 

External environment 

The  current  account  balance  benefited  from  a 
robust  export  performance  but  the  surplus  is 
set to deteriorate with the recovery of domestic 

(2)  Growth  of 

these  variables  has  however  decreased 

somewhat over this period. 

(3)  In  particular,  the  rural  mean  incomes  as  a  percentage  of 
urban incomes was 55.2 % in 2015, the lowest in the EU. 

6 

6.97.07.17.27.37.47.57.67.7-60-50-40-30-20-100070809101112131415MillionsThousandsNet migration (lhs)Natural increase (lhs)Population (rhs)BEBGCZDKDEEEELESFRHRITCYLVLTHUMTNLATPLPTROSLSKFISEUKR² = 0.363.04.05.06.07.08.09.0406080100120140Income quintile share ratio S80/S20GDP per capita in PPS 
 
                                                           
 
                                                           
1.7).  For 

demand.  Driven  by  stable  demand  from  EU 
trading  partners  and  a  strong  tourism  season, 
exports  performed  well  in  2016.  As  a  result,  the 
current  account  balance  is  estimated  to  have  been 
at  2.6 %  of  GDP  in  2016,  after  0.4 %  in  2015 
instance,  manufacturing 
(Graph 
industries,  closely 
in  global  value 
integrated 
chains, have been a major component of the gains 
in export market shares in recent years (see Section 
4.4).  Despite  the  expected  further  increase  in 
exports,  the  current  account  surplus  is  forecast  to 
decrease  to  1.4 %  in  2017  and  0.8 %  in  2018, 
mainly  due  to  higher  import  growth  fuelled  by  a 
strong  domestic  demand  and  by  the  expected  rise 
in energy costs. 

Graph 1.7:  Current account developments 

Source: European Commission 

international 

The  net 
investment  position 
(NIIP)  has  significantly  improved  in  recent 
years.  From  a  peak  of 95 %  of GDP  in  2009,  the 
negative  NIIP  improved  to  61 %  in  2015  (Graph 
1.8).  The  main  factors  include  the  increase  in 
reserve  assets,  the  reduction  of  banks’  liabilities 
towards  parent  companies  as  well  as  the  increase 
of  foreign  assets  by  domestic  companies  (mainly 
pension  funds  but  also  banks).  Positive  trade 
balance  developments  and  the  strong  economic 
growth  performance  have  also  contributed  to  the 
positive  NIIP  trend.  It  should  be  noted  that  such 
negative  NIIP  figures  are  not  uncommon  for  a 
catching up economy and are broadly in line with 
peer 
direct 
investment (FDI) funds an increasingly large share 
of the NIIP. 

countries.  Moreover, 

foreign 

1. Economic situation and outlook 

Graph 1.8:  Net international investment position 

(1) 98-09 ESA95 
10-15 ESA2010 
Source: European Commission 

Financial sector 

Headline indicators suggest that financial sector 
robustness  has  increased,  but  vulnerabilities 
remain.  The  aggregate  capital  adequacy,  risk 
coverage  and  liquidity  of  the  banking  sector  as  a 
whole  have  strengthened  since  the  tensions  in  the 
summer of 2014. Profitability of the banking sector 
remains  sound.  Nevertheless,  the  results  of  the 
asset quality review in the banking sector point to 
pockets  of  weaknesses,  including  in  systemic 
institutions,  which  warrant  supervisory  attention. 
The  reviews  of  pension  funds  and  insurance 
companies  also  showed  the  sectors  are  robust 
overall  but  highlighted  weaknesses 
in  some 
undertakings. Related-party and connected lending 
as  well  as  exposure  to  hard-to-value  assets  are 
additional  challenges  for  supervision  (see  Section 
4.2).  

Private  sector  lending  is  showing  signs  of  a 
nascent  recovery.  Lending 
to  non-financial 
corporations and to households has been gradually 
gaining  strength  (Graph  1.9).  The  pace  of  growth 
appears  to  have  picked  up  particularly  after  the 
finalisation  of  the  Asset  Quality  Review  (AQR) 
and  stress  tests  in  the  banking  sector  (see  Section 
4.2). There are signs of a credit demand recovery, 
among  households, 
in  particular 
reflecting 
strengthening 
labour  market  conditions  and 
steadily decreasing lending rates. However, despite 
the  growing  flow  of  loans,  stocks  have  remained 
fairly stagnant (see Section 4.4).  

7 

-40-30-20-1001020070809101112131415% of GDPCapital account (KA)Secondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA)-150-100-50050989900010203040506070809101112131415% of GDPNet portfolio invest., equity and investment fund shares/unitsNet portfolio invest., debt securitiesOther invest. (net)Net direct invest.Net financial derivativesNet portfolio invest., debt securitiesNet int'l investment positionMarketable debt (portfolio debt instr., other invest. and res. assets, net) 
 
 
1. Economic situation and outlook 

Graph 1.9: 

Private sector banking credit flow, 12-month 
moving sums 

house  prices.  The  pace  of  the  increase  may  pose 
overvaluation risks. 

Public finances 

Fiscal  consolidation  has  moved  faster  than 
planned.  The  public  deficit  is  expected  to  have 
decreased from 1.7 % in 2015 to 0.4 % of GDP in 
2016.  Both  revenue  and  expenditure  performed 
better 
than  expected  (Graph  1.10).  Revenue 
benefited  from  better  macroeconomic  conditions 
and from measures such as increases in the rates of 
excise duties for cigarettes and liquid heating fuels. 
tax  control  and 
Some 
in 
collection 
signs  of 
together  with 
improved  tax  compliance,  also  contributed  to  the 
overall  revenue  performance.  The  lower-than- 
budgeted  expenditure  is  mainly  due  to  lower 
capital  and  other  current  spending,  as 
the 
implementation of the new EU funds programmes 
has yet to gain momentum. 

improvements 
systems, 

the 

Fiscal consolidation is set to continue. According 
to  the  European  Commission  winter  forecast,  the 
budget  deficit  is  forecast  at  0.5 %  and  0.3 %  in 
2017  and  2018,  respectively.  Revenue  is  forecast 
to  continue  improving  on  the  back  of  positive 
macroeconomic  developments.  Expenditure 
is 
expected  to  increase  mainly  due  to  increases  in 
some  categories  of  public  wages  in  2017  and 
higher  capital  expenditure,  most  of  which  to  be 
matched by revenue from EU funds. The structural 
deficit is expected to drop to 0.3 % of GDP, below 
the  medium-term  budgetary  objective  of  1 %  of 
GDP in 2016, and to remain below 0.5 % of GDP 
in both 2017 and 2018. 

Public debt is projected to decrease after 2016. 
General  government  debt  increased  to  29 %  of 
GDP  in  2016,  mainly  driven  by  a  temporary 
increase  in  cash  buffers.  It  is  then  forecast  to 
decline to 27.3 % of GDP in 2017 and to 26 % in 
2018  as  a  result  of  the  relatively  low  primary 
balance  and  the  impact  of  the  improved  debt 
financing  conditions  as  well  as  the  financing  of 
debt  repayments  partly  by  the  existing  cash 
buffers. 

Note: Volume of new loans to non-financial corporations 
and households, 12-month moving sum 
Source: Bulgarian National Bank, European Commission 

inhibit  bank 

lending.  After 

Both  supply  and  demand  constraints  continue 
to 
tightening 
significantly  following  the  2009  crisis,  banks' 
lending  standards  have  remained  rather  strict  for 
corporates, while relaxing for consumer credit and 
mortgages (Bulgarian National Bank, 2016a). Still-
high  corporate  indebtedness  and  difficulties  in 
dealing with delinquent companies increase banks' 
risk  aversion  and  impinge  upon  credit  supply  to 
firms  (see  Section  4.2)  (4).  Meanwhile,  the  credit 
worthiness  of  households  has  increased  on  the 
back of strong wage growth and lower debt levels, 
as well as a more active secondary market for non-
performing  consumer 
loans  (see  Box  4.2.1). 
Private  sector  demand  for  credit  has  been  weak 
and economic growth is less credit-dependant than 
in the past.  

House prices have increased rapidly recently, as 
lending  conditions  for  households  have  eased. 
Residential  property  prices  have  increased  by 
around  10 %  on  average  between  December  2014 
and  September  2016.  The  increase  was  higher  in 
the  capital,  Sofia  –  around  16 %  (NSI,  2016). 
Previously,  housing  prices  bottomed  out  in  2013 
and  grew  modestly  until 
the  end  of  2014. 
Favourable  lending  conditions  and  an  improved 
labour  market  contributed  to  the  acceleration  of 

(4)  Debt of non-financial corporations stood at 89% of GDP in 

2015. 

8 

6,0007,0008,0009,00010,00011,00012,00013,00014,00015,00015%20%25%30%35%40%Dec 07Dec 08Dec 09Dec 10Dec 11Dec 12Dec 13Dec 14Dec 15Dec 16in % of GDPin EUR mnEUR mn% of GDP 
 
                                                           
1. Economic situation and outlook 

Graph 1.10:  Public deficit reduction breakdown, 2016 vs 

Graph 1.11:  SOE liabilities as % of GDP per supervising 

2015, in bn EUR 

ministry 

Source: European Commission  

Source: Ministry of Finance, Bulgaria 

from 

liabilities 

Risks to the fiscal outlook mainly relate to high 
contingent 
state-owned 
enterprises. According to the Ministry of Finance, 
total  liabilities  of  state-owned  enterprises  (SOEs), 
where  the  State  owns  at  least  50%  and  exerts 
control, amounted in September 2016 to more than 
18 %  of  GDP.  The  highest  share  of  contingent 
liabilities  belongs  to  entities  outside  the  general 
government  (based  on  the  Eurostat  definition) 
which,  as  such,  do  not  contribute  to  the  public 
deficit and debt. The most indebted SOEs seem to 
be those in the energy sector (Graph 1.11).  

A  recent  example  of  a  contingent  liability  that 
materialised  is  the  Belene  case.  Following  the 
June  2016  ruling  of  the  International  Court  of 
Arbitration  on  the  cancelled  project  to  build  a 
nuclear  reactor  in  Belene,  the  National  Energy 
Company  (NEK)  had  to  compensate  the  Russian 
Atomstroyexport  with  EUR  601mn  (1.3 %  of 
GDP). The payment was finally made in December 
2016  after  the  government  extended  an  interest-
free loan to NEK. 

9 

0.40.30.2-0.3-2.80.0-0.70.10.30.0-0.5-0.3-2.70.1-3.0-2.5-2.0-1.5-1.0-0.50.00.51.0Indirect taxesDirect taxesSocial contributionsSales and other current revenueCapital transfers receivedCompensation of employeesIntermediate consumptionSocial transfers in kindSocial transfers other than in kindInterestSubsidiesOther current expenditureGross fixed capital formationOther capital expenditure2016012345678910Ministry of EnergyMinistry of Transport andICTMinistry of FinanceMinistry of RegionalDevelopment and PublicWorksOther% of GDP201420152016 (end September) 
 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators 

(1)  Sum of portfolio debt instruments, other investment and reserve assets,(2,3) domestic banking groups and stand-alone 
banks.(4) domestic banking groups and stand-alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU 
and non-EU) controlled branches. 
Source: European Commission 

10 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)6.8-3.61.31.90.00.91.33.63.32.92.8Private consumption (y-o-y)8.3-4.51.42.03.0-2.52.74.53.22.92.8Public consumption (y-o-y)2.3-5.92.02.2-2.00.60.11.41.12.02.3Gross fixed capital formation (y-o-y)17.7-17.7-17.7-4.41.80.33.42.7-0.53.23.6Exports of goods and services (y-o-y)12.7-11.711.012.62.09.63.15.75.14.44.5Imports of goods and services (y-o-y) 16.8-21.5-0.99.95.54.35.25.43.24.34.6Output gap2.0-1.9-1.10.3-0.4-0.7-1.4-0.7-0.2-0.1-0.1Potential growth (y-o-y)6.02.20.50.50.71.22.12.92.82.82.8Contribution to GDP growth:Domestic demand10.4-9.8-3.70.61.9-1.52.53.62.12.82.8Inventories0.5-3.2-0.10.20.2-0.80.2-0.10.00.00.0Net exports-4.19.45.11.0-2.13.1-1.30.11.20.20.0Contribution to potential GDP growth:Total Labour (hours)1.5-0.8-1.6-1.5-1.4-0.90.10.60.50.40.3Capital accumulation 2.42.31.21.11.21.21.01.11.01.01.0Total factor productivity2.00.70.80.90.80.81.01.21.31.41.5Current account balance (% of GDP), balance of payments-22.9-8.3-1.70.3-0.91.30.10.4...Trade balance (% of GDP), balance of payments-19.1-7.7-3.00.2-3.3-0.7-0.61.0...Terms of trade of goods and services (y-o-y)2.52.30.93.9-2.3-0.51.21.40.6-0.30.3Capital account balance (% of GDP)-0.51.30.81.21.31.12.23.1...Net international investment position (% of GDP)..-91.9-82.8-77.9-73.3-75.2-60.0...Net marketable external debt (% of GDP)1..-9.3-2.53.66.29.517.4...Gross marketable external debt (% of GDP)1..66.058.459.157.262.954.5...Export performance vs. advanced countries (% change over 5 years)57.829.216.821.310.99.514.015.22...Export market share, goods and services (y-o-y)6.3-4.5-7.612.1-4.56.50.6-1.7...Net FDI flows (% of GDP)-20.9-6.8-2.4-2.9-2.5-3.0-2.1-3.5...Savings rate of households (net saving as percentage of net disposable income)-14.1-2.6-5.1-4.3-10.0-3.1-16.5....Private credit flow (consolidated, % of GDP)27.94.73.61.33.07.2-1.1-0.3...Private sector debt, consolidated (% of GDP)95.2133.8132.5124.3125.0131.8123.7110.5...of which household debt, consolidated (% of GDP)18.126.826.023.823.223.123.121.7...of which non-financial corporate debt, consolidated (% of GDP)77.1107.0106.5100.5101.8108.7100.688.8...Corporations, net lending (+) or net borrowing (-) (% of GDP)-8.21.66.06.87.16.015.07.78.18.79.2Corporations, gross operating surplus (% of GDP)26.629.329.230.230.029.730.129.428.227.927.9Households, net lending (+) or net borrowing (-) (% of GDP)-9.0-4.4-3.7-3.3-6.6-2.7-5.8-7.4-7.1-8.6-9.5Deflated house price index (y-o-y)23.7-21.0-12.3-8.7-5.30.41.51.6...Residential investment (% of GDP)4.34.72.72.21.71.71.61.4...GDP deflator (y-o-y)7.64.01.16.01.6-0.70.52.2-0.41.01.4Harmonised index of consumer prices (HICP, y-o-y)7.82.53.03.42.40.4-1.6-1.1-1.30.81.2Nominal compensation per employee (y-o-y)10.38.19.96.87.78.85.65.63.84.85.1Labour productivity (real, person employed, y-o-y)3.8-1.95.44.22.61.31.03.3...Unit labour costs (ULC, whole economy, y-o-y)6.210.24.32.55.07.44.62.31.62.32.4Real unit labour costs (y-o-y)-1.35.93.1-3.33.48.24.10.12.01.30.9Real effective exchange rate (ULC, y-o-y)4.17.71.73.21.79.04.6-0.10.32.20.2Real effective exchange rate (HICP, y-o-y)4.54.0-2.90.9-2.00.1-0.9-3.3-0.4-1.3.Tax wedge on labour for a single person earning the avg wage (%)20.721.720.921.621.621.621.621.6...Taxe wedge on labour for a single person earning 50% of the avg wage (%).21.720.921.621.621.621.621.6...Total Financial Sector Liabilities, non-consolidated (y-o-y)30.01.1-8.94.611.45.26.23.1...Tier 1 ratio (%)2.17.516.514.914.615.018.518.2...Return on equity (%)3.8.78.34.73.64.11.72.6...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).11.517.919.719.818.614.413.0...Unemployment rate8.76.810.311.312.313.011.49.27.77.16.8Long-term unemployment rate (% of active population)5.02.94.76.36.87.46.95.6...Youth unemployment rate (% of active population in the same age group)17.915.121.925.028.128.423.821.618.9..Activity rate (15-64 year-olds)64.767.266.765.967.168.469.069.3...People at-risk poverty or social exclusion (% total population)55.646.249.249.149.348.040.141.3...Persons living in households with very low work intensity (% of total population aged below 60)12.96.98.011.012.513.012.111.6...General government balance (% of GDP)1.5-4.1-3.1-2.0-0.3-0.4-5.5-1.7-0.4-0.5-0.3Tax-to-GDP ratio (%)30.927.226.025.326.728.228.429.029.830.030.2Structural budget balance (% of GDP)..-2.7-2.0-0.2-0.2-1.8-1.4-0.3-0.5-0.3General government gross debt (% of GDP)22.613.715.315.216.717.027.026.029.027.326.0forecast 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

implementing 

the  2016(5) 
Progress  with 
recommendations  addressed  to  Bulgaria  has  to 
be  seen  in  a  longer  term  perspective  since  the 
introduction of the European Semester in 2011.  

The  fiscal  framework  has  improved  with  the 
adoption  and  implementation  of  medium-term 
fiscal strategies and the establishment of the Fiscal 
Council.  However,  there  has  been  only  limited 
progress 
the  quality  of  public 
spending.  Despite  some  progress  since  2015, 
addressing  tax  non-compliance  and  the  informal 
economy remains a challenge.  

improving 

in 

The most notable progress has been achieved in 
statutory 
equalizing 
increasing  and 
retirement age. The relevant 2013 and 2014 CSRs 
were  fully  addressed  with  the  2015  pension 
reform.  

the 

The  adoption  of  the  Pre-school  and  School 
Education Act is another example of successful 
CSR 
implementation.  The  higher  education 
reform accelerated. However, since 2014 Bulgaria 
has  not  progressed  much  on 
the 
provision  of  quality  education  for  disadvantaged 
groups.  

improving 

the  authorities.  However, 

Calls to extend the coverage and effectiveness of 
active  labour  market  policies  have  had  some 
impact, but the targeting of measures and their 
link  with  social  services  remains 
limited. 
Successive CSRs to address the high percentage of 
young  people  not  in  employment,  education  or 
training  have  resulted  in  a  variety  of  measures 
undertaken  by 
this 
progress  has  not  yet  translated  into  significant 
results.  Good  progress  has  been  achieved  in 
reforming the public employment services with the 
help  of 
the  European  Network  of  Public 
Employment Services. Work on a minimum wage 
setting  mechanism  based  on  objective  criteria  has 
progressed  somewhat,  as  the  social  partners  and 
the government now seem to agree on the criteria 
to be used, but not on their weights. Calls to reduce 
undeclared  work 
the 
to 
introduction  of  one  day  contracts  in  agriculture, 
but  the  share  of  undeclared  work  remains  high. 

inspections  and 

led 

(5)  For  the  assessment  of  other  reforms  implemented  in  the 

past see, in particular, Section 4.  

There  was  only  limited  progress  on  CSRs  to 
reduce poverty and improve the situation of Roma. 

Healthcare reforms in 2015-2016 have addressed 
concerns  raised  in  successive  CSRs,  but  actual 
implementation  of  agreed  measures,  such  as 
selective contracting based on the National Health 
Map, is stalling.  

Progress  has  been  slow 
insolvency framework since 2014. 

in 

reforming 

the 

under 

the  National 

Recommendations  on  public  procurement,  first 
introduced in 2011, have not significantly changed 
over  the  years.  In  the  context  of  implementing 
Public 
commitments 
Procurement  Strategy  2014-2020  as  well  as  the 
Action Plan on the Partnership Agreement (for the 
programming  period  2014-2020),  a  number  of 
measures have been put in place, especially in the 
last quarter of 2016. Their concrete impact on the 
Bulgarian  public  procurement  landscape  remains 
to be seen. There has been insufficient progress so 
far  in  enhancing  the  authorities'  administrative 
capacity  in  public  procurement  and  no  specific 
achievements in the e-procurement. 

to 

the 

improve 

Overall  Bulgaria  has  made  some  progress  in 
country-specific 
2016 
addressing 
recommendations.  Efforts 
tax 
compliance and collection are ongoing, while only 
limited  progress  was  done  to  tackle  undeclared 
work.  The  asset  quality  review  and  stress  tests  in 
the  banking  sector  were  completed  but  did  not 
respect  full  transparency  and  their  design  did  not 
fully  address 
the  recommendation.  Follow-up 
actions  have  been  addressed  to  banks,  and  the 
ongoing implementation is due by April 2017. The 
pension  funds  and  insurance  sector  reviews  were 
completed with a high degree of independence and 
transparency.  The  work  performed  to  identify 
related-party  investments  does  not  allow  to  fully 
address  the  recommendation.  The  supervisor  took 
the  least  conservative  approach  when  requesting 
the  initial  follow-up  actions.  Shortcomings  in 
to  be 
financial 
supervision 
adequately 
steps 
the  banking  sector.  Some 
already 
taken  for 
integration  of 
progress  was  made  on 
employment  services  and  social  assistance,  while 
progress  with  the  reform  of  pre-school,  education 
limited.  The  Youth 
and  healthcare 

addressed,  notwithstanding 

remains 

remain 

sector 

the 

11 

 
 
                                                           
2. Progress with country-specific recommendations 

Guarantee  is  being  implemented,  but  employment 
indicators  for  young  people  remain  of  concern.  A 
minimum  wage  setting  mechanism  is  still  to  be 
developed.  On insolvency,  the  amendments  to  the 
Commercial  Act  were  approved  with  significant 
delay,  in  December  2016.  The  government  has 
taken  some  measures  to  implement  the  National 
Public  Procurement  Strategy.  However,  actions  to 
introduce  e-procurement  and  to  strengthen  the 
capacity  of  the  Public  Procurement  Agency  and 
the contracting authorities are still ongoing. 

12 

 
2. Progress with country-specific recommendations 

Table 2.1: 

Summary Table on 2016 CSR assessment 

(1) This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 

13 

Bulgaria Overall assessment of progress with 2016 CSRs: Some CSR 1: Achieve an annual fiscal adjustment of 0,5 % of GDP towards the medium-term budgetary objective in 2016 and in 2017. Further improve tax collection and take measures to reduce the extent of the informal economy, including undeclared work. (MIP relevant)  Some progress in improving tax collection and reducing the extent of the informal economy     CSR 2: By the end of 2016, finalise the asset quality review and stress test of the banks. By the end of 2016, complete the balance-sheet review and stress test of the insurance companies and the review of private pension funds’ assets. Take, as necessary, follow-up actions in all three sectors and continue to improve banking and non-banking supervision. (MIP relevant) Some progress   Some progress in finalising the asset quality review and stress test of the banks  Substantial progress in finalising the balance-sheet review and stress test of the insurance companies and the review of private pension funds' assets   Limited progress in taking, as necessary, follow-up actions […] and in improving banking and non-banking supervision CSR 3: Reinforce and integrate social assistance, including relevant social services, and active labour market policies, in particular for the long-term unemployed and young people not in employment, education or training. Increase the provision of quality education for disadvantaged groups, including Roma. Improve the efficiency of the health system by improving access and funding, and health outcomes. In consultation with social partners establish guidelines and criteria for setting the minimum wage. Increase the coverage and adequacy of the minimum income scheme. (MIP relevant) Limited progress   Some progress in reinforcing and integrating social assistance, including relevant social services, and active labour market policies […]  Limited progress in increasing the provision of quality education for disadvantaged groups, including Roma  Limited progress in improving the efficiency of the health system by improving access and funding, and health outcomes  Limited progress in establishing guidelines and criteria for setting the minimum wage.  Limited progress in increasing the coverage and adequacy of the minimum income scheme CSR 4: Reform the insolvency framework to accelerate recovery and resolution procedures and improve their effectiveness and transparency. Increase the capacity of the courts regarding insolvency procedures. Strengthen the capacity of the Public Procurement Agency and contracting authorities and improve the design and control of public tendering procedures, in particular by fully implementing the National Strategy for the development of the Public Procurement Sector (2014-2020). Speed up the introduction of e-procurement. (MIP relevant) Limited progress   Limited progress in reforming the insolvency framework […]  Some progress in strengthening the capacity of the Public Procurement Agency and contracting authorities and improving the design and control of public tendering procedures […] and limited progress in speeding up the introduction of e-procurement     
 
 
 
 
2. Progress with country-specific recommendations 

14 

Box 2.1: Contribution of the EU budget to structural change in BulgariaBulgaria is a large beneficiary of EU structural funds. The country will receive EUR 9.9 billion over the period 2014-2020 from the European Structural and Investment Fund (ESI Funds). This is equivalent to 3 % of GDP (annually over 2014-2017) and over 49 % of total public investment (1). By end- 2016, an estimated EUR 3.3 billion, which represents about 33 % of the total allocation for ESI Funds, had already been allocated to concrete projects (See also Section 4.4.2). Apart from the ESI Funds, the European Fund for Strategic Investments, Horizon 2020, the Connecting Europe Facility and other directly managed EU funds are additional financing sources. By end-2016, Bulgaria has signed agreements for EUR 294 million under the Connecting Europe Facility, while the EIB Group has approved financing under EFSI for EUR 204 million, which is expected to trigger EUR 969 million in total.   ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionalities and targeted investment (2). Examples include the water and transport infrastructure sectors, as well as education, R&I, public procurement and healthcare. These reforms have led to a better implementation of public investment projects, including those financed from both national sources and EU instruments. Fulfilment of the outstanding ExACs is on track, while critical reforms are pending in public procurement, smart specialisation and air quality. Administrative reforms support is also available indirectly through targeted financing under the ESF, advice from the Structural Reform Support Service and indirectly through technical assistance.  When designing the 2014-2020 programmes, relevant CSRs with focus on  structural issues were taken into account  They include, inter alia, the reduction of obstacles to investment in education, social and health sectors by improving administrative and technical capacities of the local public administration. In addition, ESI Funds help to improve the overall business environment, including through facilitating SME access to finance. In particular, the European Social Fund (ESF),contributes to reforming systemic institutional capacity changes. It has also led to the creation and funding of centres that provide integrated employment and social services (Public Employment Services). In addition, ESF actions also target young people who are neither in employment or education, nor in training or are long-term unemployed (3).   ESI Funds also help to address wider structural obstacles to growth and competitiveness. The ESI Funds support reforms in the education system, labour market and state administration institutions. They also integrate disadvantaged groups, such as the Roma, address bottlenecks in transport infrastructure, and incentivise innovation and private investments (some EUR 500 million are targeted in research, innovation and science). ESI Funds also help some 10 000 enterprises and 400 start-ups, while increasing the long-term sustainability of the utility sector through investment in compliant waste water treatment for 1.5 million inhabitants.   https://cohesiondata.ec.europa.eu/countries/BG                                                            (1) National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries (2) Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and conditions for the majority of public investments areas. For Members States that did not fulfil all the ex-ante conditionalities by the end of 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments.       (3)    To date, 23 000 young people have made use of the Youth Employment Initiative, financed measures.  
 
 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

The  Alert  Mechanism  Report-2017  called  for 
further in-depth analysis to monitor progress in 
the  unwinding  of  the  excessive  imbalances 
identified  in  the  2016  MIP  cycle.  The  selection 
was  motivated  by  the  fact  that  Bulgaria  was 
identified  with  excessive  imbalances  in  spring 
2016  after  IDR  analysis,  so  that  a  new  IDR  is 
needed to assess how these imbalances evolve. The 
identified  excessive  macroeconomic  imbalances 
were  remaining  fragilities  in  the  financial  sector 
and high corporate indebtedness in a context of the 
high share of long-term unemployment. 

imbalances  have  developed. 

Analyses  integrated  in  this  Country  Report 
provide an In-Depth Review (IDR) into how the 
identified 
In 
particular  IDR  relevant  analysis  is  found  in  the 
following  sections:  financial  sector  imbalances, 
discussed in section 4.2.1; developments in private 
indebtedness  in  section  4.2.4.  An  additional  IDR 
relevant 
to  private 
indebtedness  and  growth  is  that  of  investment, 
analysed  in  section  4.4.  Labour  market  related 
adjustment aspects are dealt with in section 4.3. 

through 

topic 

links 

its 

level  in  a  decade  and  in  line  with  regional  peers. 
Most of  the  NIIP  is composed  of  relatively stable 
foreign direct investment (FDI). 

Private sector debt remains high in spite of the 
ongoing deleveraging. Overall private sector debt 
fell  decisively  from  124 %  of  GDP  in  2014  to 
111 %  in  2015  this  was  predominantly  driven  by 
non-financial  corporates.  Corporate  deleveraging 
continues  to  be  constrained  by  limited  reform 
progress  on  the  insolvency  framework.  Corporate 
debt servicing is aggravated by the persistently low 
inflation  as  well  as  high  non-financial  corporates 
leverage. In particular, the elevated corporate debt 
investment  and 
burden  can  negatively  affect 
growth over the medium term. 

of 

Despite 

adjustment. 

Persistent  structural  issues  hamper  the  labour 
notable 
market 
improvements  in  the  unemployment  rate,  around 
60 % 
long-term 
unemployed 
unemployed.  In  addition,  skills,  sectoral  and 
geographical  mismatches  negatively  impact  the 
functioning  and  the  adjustment  capacity  of  the 
labour market. 

the 

are 

3.1 Imbalances and their gravity 

Despite  robust  aggregate  performance,  pockets 
of  fragilities  in  the  banking  sector  continue  to 
warrant  attention.  Issues  are  linked  to  the  asset-
quality  of  certain  parts  of  the  system,  particularly 
due to the lack of adequate diversification and the 
existence  of  connected  lending  and  related-party 
transactions.  Though  not  widespread  across  the 
system,  the  materialisation  of  these  risks  could 
jeopardize overall financial stability. 

funds 

Similar fragilities are also present in other parts 
of the financial system, including the insurance 
sectors.  Related-party 
and  pension 
transactions,  investments  in  illiquid  securities  and 
non-traded  assets  as  well  as  complex  cross-
ownership structures for some institutions increase 
the overall risks to financial stability. 

Bulgaria  continues  to  exhibit  a  high  negative 
net  international  investment  position  (NIIP), 
though  this  partly  reflects  its  status  as  a 
catching-up  economy.  Bulgaria’s  NIIP  further 
improved  to  -61 %  of  GDP  in  2015,  the  highest 

3.2 Evolution, prospects, and policy responses  

The  positive  macroeconomic  developments  in 
2016,  together  with  some  policy  action,  will 
support  the  unwinding  of  imbalances  in  the 
Bulgarian  economy.  The  banking  sector  showed 
very  good  performance  on  aggregate  throughout 
2016  in  terms  of  profitability,  liquidity,  capital 
adequacy  and  asset  quality.  Deleveraging  in  the 
private sector also picked up steam supported by a 
strong rebound in nominal GDP growth. However, 
concerns remain as legacy issues have not yet been 
fully dealt with. 

The authorities are taking measures to address 
the  challenges  faced  by  the  banking  sector. 
Acknowledging the risks, the authorities organised 
the 
independent 
and  completed 
banking,  insurance  and  pension  fund  markets. 
While the banking review showed robust aggregate 
results,  two  institutions,  one  of  which  systemic, 
their  capital  buffers  and 
need 
policies. The follow-up of the asset quality review 
and stress tests has not yet been finalised. 

to  strengthen 

reviews  of 

15 

 
 
3. Summary of the main findings from the MIP in-depth review 

the 

insolvency 

inter  alia  to  accelerate  pre-court  and  out-of-court 
restructuring have been approved with a significant 
delay  in  December  2016  while  other  measures  to 
await 
improve 
implementation.  (see  Section  4.6).  Furthermore,  a 
stronger  market  for  sales  of  SME  and  mortgage 
NPLs  could  further  facilitate  banks  to  write-off 
their  NPL  stock.  This  could  contribute  to  the 
ongoing corporate deleveraging trend.  

framework 

Issues  hampering  an  effective  matching  of 
demand  and  supply  in  the  labour  market 
persist. Labour market adjustment is still hindered 
by the limited prioritisation and targeting of active 
labour  market  policies.  Structural  issues  remain, 
such as the high share of long-term unemployment 
and  various  mismatches.  In  addition,  transparent 
mechanism for setting the minimum wage was not 
developed. 

3.3 Overall assessment 

Bulgaria faces sources of imbalances which are 
mainly  linked  to vulnerabilities  in  the financial 
sector  as  well  as  high  corporate  indebtedness. 
The  robustness  of  the  banking  sector  appears  to 
have  improved.  In  particular,  the  asset  quality 
review  and  the  stress  test  conducted  in  2016  did 
not reveal major capitalisation needs on aggregate, 
even  though  some  pockets  of  vulnerabilities  were 
confirmed.  The  legacy  issues  linked  to  weak 
governance  and  supervision  have  not  yet  been 
fully  dealt  with.  Follow-up  measures,  notably  for 
the  weakest  institutions,  are  in  the  process  of 
implementation.  Similarly,  the  reviews  of  the 
pension fund and insurance companies showed that 
the  sectors  are  robust  overall.  Nevertheless, 
insurance 
individual  weaknesses  of  certain 
undertakings  and  insurance  groups  as  well  as 
wider issues related to some insurance receivables 
and  reinsurance  contracts  remain  a  concern. 
Further issues in the pension fund sector, including 
related-party investments and hard-to-value assets, 
will  be  key  supervisory  challenges.  While  the 
private  sector  is  on  an  orderly  deleveraging  path, 
the  elevated  corporate  debt  burden  can  negatively 
affect  investment  and  growth  over  the  medium 
term. In this regard, the reforms to the insolvency 
framework  can  further  help  with  private  sector 
rapidly 
indebtedness.  The  NIIP  has  been 
improving  in  line  with  the  strong  economic 
recovery,  the  current  account  surplus  and  the 
ongoing  deleveraging.  Meanwhile,  persistent 

and 

insurance 

Independent  reviews  of  the  private  pension 
funds 
companies  were 
concluded. The insurance sector review showed a 
quarter of the undertakings did not meet the capital 
requirements.  Follow-up  actions  have  either 
already  been  taken  by  the  concerned  entities  or 
have  been  requested  by  the  supervisor.  Further 
considerable  adjustment  needs  remain  possible 
until  questions  over  certain  reinsurance  contracts, 
are  fully  clarified.  Similarly,  further  adjustments 
could result from a full group-level assessment for 
two  of  the  insurance  groups,  which  was  not 
completed during the review. Further impairments 
may  occur  from  overdue  insurance  receivables. 
The  pension  funds'  review  resulted  in  minor 
adjustments to the funds' net assets. However, the 
reviews  highlighted  important  issues  for  some  of 
the 
illiquid 
financial  instruments,  related-party  exposures  in 
the  broader  economic  sense,  and  complex  cross-
ownership  structures.  All  of  these  factors  could 
have a significant impact on the long-term benefits 
accruing to the pension funds' account holders.   

investments 

including 

funds, 

in 

Some  challenges  persist  in  financial  sector 
supervision. The valuation of less liquid assets is a 
challenge for supervision. A risk-based approach is 
necessary  to  tackle  exposure  to  hard-to-value 
assets  and  related-party  and  connected  exposures. 
cross-ownership 
Complex 
structures  appear 
legal 
the 
restrictions  but  not  the  economic  rationale  of 
limiting  the  risk  for  the  clients  and  sector  as  a 
whole. Further issues related to certain reinsurance 
contracts remain to be clarified.  

and 
to  only  satisfy 

ownership 

External  indebtedness  is  expected  to  further 
decrease moderately and is broadly in line with 
regional  peers.  The  NIIP  has  been  on  a  strong 
downward  trend  since  2009,  when  it  reached  a 
record -95 % of GDP. Specific policy measures are 
account 
Positive 
not 
developments  would  contribute 
to  a  further 
reduction  of  the  NIIP.  In  contrast,  rapid  wage 
growth  could  negatively  impact  competitiveness 
and,  hence,  current  account  and  NIIP  levels  over 
the medium term. 

expected. 

current 

from  accelerating 

The  reduction  of  corporate  indebtedness  could 
insolvency 
benefit 
reforms  and  a  deeper  secondary  market  for 
non-performing loan (NPLs) sales. Amendments 
to  the  Commercial  Act  by  Parliament  which  aim 

the 

16 

 
3. Summary of the main findings from the MIP in-depth review 

structural  weaknesses  still  hamper  the  labour 
market adjustment, as policy actions have not been 
sufficient to address long-term unemployment and 
market  mismatches,  nor  to  improve  the  wage 
setting system. 

17 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.1: 

MIP Assessment matrix 

(Continued on the next page) 

18 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) Financial sector Risks stemming from the banking and non-banking financial sector are related to credit quality concerns and unsound business practices. The ownership structure of some institutions renders them vulnerable to concentration and operational risk through imprudent management, related-party and connected exposures. The materialisation of these risks would pose a challenge for financial stability, for the efficiency of resource allocation in the economy and for public finances.  The asset quality review and stress test of the banking sector carried out in 2016 did not identify a significant need for additional capital across the sector. Nevertheless, exposure to hard-to-value assets and related-party and connected lending remains a challenge for supervision (See Section 4.2).  The relevance of pension funds and insurance industries for macro-financial stability has recently increased in light of their growing role. Additionally, the pension funds and insurance companies review highlighted the importance of identifying related parties and the difficulty of valuing investments in illiquid markets and instruments. The banking asset quality review revealed that two banks, one of which systemically important, need to strengthen their capital buffers. Several banks were asked to review their internal policies and business plans. The review also revealed a significant amount of additional non-performing exposures.  A favourable macroeconomic environment and the presence of a secondary market, albeit limited in size and scope, allows banks to gradually reduce the size of their non-performing loans. However, the elevated level of non-performing loans continues to pose a challenge. The insurance sector review showed that a quarter of the reviewed companies and groups did not fully meet the capital requirements. Subsequent actions have been either taken proactively or requested as follow-up actions by the supervisor.  The Bulgarian National Bank, with the support of an external consultant, conducted an asset quality review and stress tests of the entire system following the methodology established by the ECB. The design of the exercise, however, deviated to some extent from international practice for country specific reviews in terms of independence and transparency. The BNB has addressed follow-up recommendations to banks. Their implementation is ongoing.  Banking supervision is in the process of being strengthened to align it with good international practices. Challenges going forward include dealing with related-party and connected lending and exposures to hard-to-value assets. The Financial Supervision Commission, together with EIOPA and supported by other national and EU authorities, organised an independent review and stress tests of the insurance companies' balance sheets and private pension funds' assets. The reviews were completed to a high degree of independence and transparency. Some issues, including valuing illiquid financial instruments and assets as well as related-party exposures, were not fully tackled. So far, follow-up actions have not been sufficiently conservative. The reviews of insurance companies raised important issues related to the treatment of some insurance receivables, certain reinsurance contracts and group level supervision.  External indebtedness Bulgaria continues to exhibit a high negative NIIP of -61 % of GDP, mainly linked to a large stable stock of inward FDIs. The negative NIIP has significantly improved from a peak of 95 % of GDP in 2009 to 75 % in 2014 and 61 % in 2015. The current account has been positive since 2013, in line with the improved export performance. Positive current account developments in the future would contribute to a further reduction of the (negative) NIIP levels. The latest NIIP figures are not unusual for a catching up economy and are in line with peer countries. No policy steps have been taken by the authorities since the external debt issue is not identified as a pressing one.  
 
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

Source: European Commission 

19 

Corporate debt and deleveraging The accumulation of a high private sector debt in the pre-crisis years resulted in significant deleveraging needs. The ongoing deleveraging is especially reflected on the subdued credit demand. Low inflation has put a further strain on corporate debt servicing. (see Section 4.2.4) Any deleveraging pressures may weigh on investment and growth, in particular in the medium term. High private debt, the majority comprising NFCs, continues to be a significant concern. However, the deleveraging process has been orderly with debt of NFCs almost 12 pps. lower y-o-y at 89 % of GDP in 2015. In addition, robust nominal GDP growth is set to further support the ongoing orderly deleveraging path. Further policy steps are needed to improve the insolvency framework, including legislation, institutions and practices. In 2015, the Government in 2015 has initiated work on amending the insolvency-related parts of the Commercial Act with a focus on pre-court and out-of-court restructuring settlements as well as on accelerating court rulings. However, adoption of the amendments to the Commercial Act by Parliament has been significantly delayed (See Section 4.6.3). Adjustment issues Labour market The existing mismatches (incl. skills, sectoral, regional) impair the functioning of the labour market and its adjustment (see Section 4.3.1). The share of long-term unemployment constitutes around 60 % of total unemployment (average of Q1-Q3 2016). This is one of the highest levels in the EU and underlines the largely structural nature of unemployment. Minimum wage levels are still decided without a transparent mechanism based on relevant macro-indicators. Without such a mechanism, the right balance between the objectives of supporting employment and safeguarding labour income cannot be ensured (See Section 4.3.1). The decrease in the unemployment rate seen since 2014 is expected to continue over the forecast horizon. However, long-term unemployment as a share of total unemployment remains very high.  The administratively-decided 9.5 % raise in the minimum wage for 2017 increases the pressure on the low-skilled thus limiting the labour market adjustment. The government has taken steps to optimise its active labour market policies. However, their prioritisation and targeting remains limited.  The policy gap remains in the area of setting the minimum wage, as a transparent mechanism has still to be developed (see Section 4.3.1).  Conclusions from IDR analysis  Bulgaria continues to be subject to stock imbalances related to remaining fragilities in the financial sector and high corporate indebtedness. These imbalances could weight on credit developments and medium- term growth prospects. They also result in vulnerabilities to potential adverse shocks, which would have harmful effects on the functioning of the economy. The NIIP, though significantly improved, remains very negative but is mostly linked to stable FDI stocks.  Some stabilisation of the banking sector occurred since 2015 together with returning confidence. The financial sector reviews and stress tests identified limited additional capital needs but exposure to hard-to-value assets, the treatment of some insurance receivables and reinsurance contracts and unsound business practices remain a challenge for the supervisory authorities. Deleveraging in the corporate sector has been orderly but slow, leaving a large private sector debt stock as well as still high NPL levels. Labour market conditions have improved. The share of long-term unemployment has decreased but is still very high. Moreover, different labour mismatches continue to impair the on-going adjustment of the economy.   Follow-up measures from the reviews of bank, insurance and pension funds sectors are pending, especially to further strengthen financial supervision. Reforming the insolvency framework, a priority, remains a further challenge given the delays.   
 
 
 
 
 
 
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  FISCAL FRAMEWORK 

4.1.2.  TAX POLICY 

Its  mandate 

With  the  establishment  of  the  Fiscal  Council, 
the  framework  for  fiscal  governance  is  mostly 
complete.  The  members  of  the  Fiscal  Council 
were  appointed  by  Parliament  at  the  end  of  2015 
and the Council became operational in the first half 
includes  monitoring 
of  2016. 
compliance  with  national  and  EU  fiscal  rules, 
preparing  and  publishing  opinions  on  official 
macroeconomic forecasts and budgetary plans, and 
supervising  the  automatic  correction  mechanism. 
A  memorandum  sets  out  the  terms  of  cooperation 
with  the  Ministry  of  Finance,  which  seems  so  far 
to have been relatively good and open in terms of 
information exchange. 

The  Fiscal  Council  has  already  published  a 
number  of  opinions  and  recommendations. 
These  include  the  opinion  and  recommendations 
on the 2015-2018 Convergence Programme and on 
the  2017  draft  budget.  However,  the  absence  of 
financial  autonomy  and 
limited  human 
resources  may  constrain  the  Fiscal  Council’s 
operational capacity. 

the 

The implementation of the budgetary process is 
relatively  stable  and  predictable.  The  draft 
budget must comply with the rules and procedures 
defined  in  the  fiscal  framework  laws  (6).  These 
laws  cannot  be  amended  by  a  budget  law.  The 
expenditure  ceilings  can be  changed  twice a  year, 
in  April  in  the  context  of  the  medium-term  fiscal 
strategy  and  in  October  as  part  of  the  annual 
budget  procedures.  If  there  are  major  deviations 
from  the  budgetary  targets,  the  government  is 
required  to  amend  the  budget  and  the  medium-
term  fiscal  strategy.  Policy  measures  with  fiscal 
impact — except those initiated by members of the 
Parliament — must be accompanied by an impact 
assessment and compensating measures or sources 
of financing. 

Tackling  the  shadow  economy  and  reducing 
administrative  burden  remain  key  challenges 
despite recent encouraging improvements in tax 
collection.  The  tax-to-GDP  ratio  is  among  the 
lowest  in  the  EU  and  the  value-added  tax  (VAT) 
gap was 20 % in 2014, well above the EU median 
of  10  %  (CASE,  2016)  (7).  Tax  revenue  as  a 
percentage of GDP has increased since 2011 to an 
estimated  29.4 %  in  2016,  but  is  still  below  pre-
crisis  levels  (Graph  4.1.1).  The  increase  in  VAT 
revenues  between  2015  and  2016  suggests  some 
improvement  in  the  collection  of  indirect  taxes. 
Income  taxes  and  social  security  contributions 
remained relatively stable as a percentage of GDP 
(Graph  4.1.1),  implying  limited  progress  in  the 
fight  against  undeclared  work.  Paying 
taxes 
continues to be more time consuming than in other 
EU  Member  State,  especially  when  it  comes  to 
labour  and  consumption  taxes  (PWC,  2016,  and 
European Commission, 2016a). 

Graph 4.1.1:  Tax revenue main components 

Source: European Commission 

Indirect  taxes  have  a  higher  contribution  to 
public  revenues  than  direct  taxes.  Indirect 
taxation  accounted  for  around  53 %  of  total  tax 

(6)  Namely,  the  Public  Finance  Act  (SG  No.  15/15.02.2013) 
and  the  Law  on  Fiscal  Council  and  Automatic  Correction 
Mechanisms (SG No.29/21.04.2015). 

(7)  The VAT gap is measured as the share of VAT revenue to 

a theoretical VAT liability. 

20 

0510152025303540200820092010201120122013201420152016% GDPIndirect taxesDirect taxesSocial security contributionsEU average 
 
                                                           
 
                                                           
4.1. Public finances and taxation 

revenues  in  2015.  Energy  taxes  are  a  significant 
revenue  item,  suggesting  a  growth-friendly  tax 
structure.  However,  some  tax  rates  within  this 
category,  such  as  on  petrol  and  diesel,  remain 
among the lowest in the EU and very close to the 
EU minimum levels of taxation (8). Other growth-
friendly taxes such as recurrent property taxes are 
also relatively low (9). 

Graph 4.1.2:  Level of income inequality in EU Member 

States 

2015 data partially available for IE. 
Source: European Commission, based on Eurostat/EU SILC 

income 

inequalities. 

The  tax  system  seems  to  play  a  limited  role  in 
combating 
Income 
inequality after taxes and benefits, as described by 
the Gini coefficient (10) is one of the highest in the 
EU (Graph 4.1.2). The structure of the tax system, 
the high levels of tax evasion and undeclared work 
and  consequently  the  relatively  low  tax  revenue 
limited  fiscal  space.  The  difference 
provide 
between income inequality indices before and after 
taxes and benefits is relatively small (Graph 4.1.2). 
This  suggests  that  the  tax  and  benefits  systems 
have a limited role in reducing income inequality. 

Efforts  to  improve  the  efficiency  of  the  tax 
system  are  ongoing.  The  implementation  of  the 

(8)  The tax rate for petrol is the lowest in the EU while the rate 
for diesel is virtually equal to the EU minimum (European 
Commission, 2016c). 

(9)  0.3 %  of  GDP  versus  1.6 %  in  the  EU  in  2014  (European 

Commission, 2016a). 

by 

the 

adopted 

government 

strategy 
in 
October 2015  and  a  number  of  measures  included 
in  the  accompanying  action  plan  are  already  in 
place (Ministry of Finance – Bulgaria, 2016). The 
Law  on  VAT  was  amended  in  2016  to  further 
tighten  the  control  on  trade  in  liquid  fuels. 
Administrative measures have been put in place to 
improve  cooperation  between  customs  and  the 
Ministry  of  the  Interior  (11).  Physical  checks  for 
tax  and 
social  security  contributions  were 
increased.  The  authorities  estimate  the  impact  of 
than 
the 
for  2016 
BGN 350 million 
(Table 4.1.1).  

in  place  at  more 

(EUR 179 million) 

tax  measures 

Table 4.1.1: 

Impact of measures to improve tax collection 
in 2016 

* 10-month impact 
Source: Ministry of Finance, Bulgaria 

Progress  has  also  been  made  in  international 
tax  cooperation  in  2016.  Bulgaria  signed  and 
ratified  the  Convention  on  Mutual  Administrative 
Assistance  in  Tax  Matters  and  the  Multilateral 
Competent Authority Agreement. It also joined the 
Global  Forum  on  Transparency  and  Exchange  of 
Information for Tax Purposes. This will enable the 
country  to  receive  information  automatically  and 
upon request from a large number of jurisdictions 
around the world. 

(10) The  Gini  coefficient  is  an  index  with  a  value  between  0 
(i.e. all people earn the same income) and 1 (i.e. one person 
receives  all  the  income  in  an  economy).  That  is,  higher 
values indicate higher inequality 

(11) For  example,  the  exchange  of  information  between  the 
Ministry of the Interior and the Customs Agency by access 
to  automated  information  systems  (Ministry  of  Finance  – 
Bulgaria, 2016). 

21 

0510152025300102030405060% of total populationGini IndexMarket income Gini coefficient (income inequalities before tax and transfers) - LHSDisposable income Gini coefficient (income inequalities after tax and transfers) - LHSAt-risk-of-poverty (AROP) rate - RHSMeasureExpected impact, 2016(mn BGN)ReversechargemechanismforVAToncereal and industrial crops.40.0Extensionofthescopeandrefinementofthemechanismfortaxcontrolsoverthemovement of high risk products.30.0Strengtheningthecontrolsonvehiclescarrying"cargo"goodsandovertheproductionandtransportationofexcisegoods.11.5Improvementincross-checkingandcollectionofoverdueliabilitiesfrompublicsector contactors.*125.0Othermeasurestoimprovecollectionofoverdue liabilities.*102.5Enforcementproceedingsforthecollectionoftaxesandobligatorysocialsecuritycontributions.*42.6Total351.6% of GDP0.4 
 
                                                           
 
 
 
                                                           
4.2.  FINANCIAL SECTOR 

Risks of imbalances in the financial system are 
partly  linked  to  unsound  business  practices. 
About a fifth of the system is domestically owned, 
where shareholding is usually concentrated in one 
or  a  few  individuals  or  business  groups  (12).  If 
subjected to the business interests of their owners, 
to 
these 
institutions  may 
through 
concentration  and  operational 
imprudent  management,  as  well  as  related-party 
and  connected  exposures.  Where  these  feature  in 
systemically 
the 
vulnerability  could  affect  the  entire  financial 
system. 

institutions, 

vulnerable 

important 

risk 

be 

The  failure  of  Corporate  Commercial  Bank 
demonstrated  that  unsound  business  practices 
may be hard to detect in the normal supervisory 
process   (See  European  Commission,  2015a).  To 
address this risk, the authorities undertook an asset 
quality  review  and  stress  tests  of  the  banking 
system,  a  balance  sheet  review  and  stress  tests  of 
the  insurance  funds,  and  a  review  of  the  assets  of 
private pension funds. 

4.2.1.  BANKING SECTOR* (13) 

On  aggregate,  the  financial  soundness  of  the 
banking  system  strengthened  in  2016.  Liquidity 
continued improving with the liquid assets ratio at 
end-2016  (well  above  the  minimum  requirement) 
growing significantly relative to its level following 
the  market  tensions  in  June  2014.  The  average 
return on assets reached 1.6 % in 2016, the highest 
in  recent  years.  Aggregate  profit  increased  by 
40.5% year-on-year and amounted to EUR 645mn. 
The  increase  was  driven  mainly  by  higher  net 
interest  income,  and  lower  administrative  and 
impairment  costs.  The  profit  remains  one  of  the 
highest since the global financial crisis, also due to 
favourable  one-off  factors.  The  latter  reflected  a 
strong decline in corporate and household NPLs in 
the  final  quarter  of  the  year,  owing  also  to  NPL 
sales on the secondary market. Despite the positive 
aggregate  figures,  the  banking  sector  remains 
relatively  heterogenous  with  some  institutions 
performing  significantly  worse  than  the  average. 

(12) The  majority  of  the  financial  system  is  owned  by  large 
international institutions, allowing it to import management 
and governance practices from their parents. 

(13) An  asterisk  indicates  that  the  analysis  in  the  section 
contributes  to  the  in-depth  review  under  the  MIP  (see 
Section 3 for an overall summary of main findings). 

Ongoing  consolidation  contributes  to  rising  cost 
efficiency,  corporate  governance  and  the  overall 
strengthening  of  the  sector.  Two  major  deals, 
involving  the  Greek-owned  part  of  the  system, 
were  concluded  in  the  past  two  years.  Further 
deals,  involving  smaller  banks,  are  also  in  the 
pipeline. 

Asset quality review (AQR) and stress tests (ST) 

The  AQR  of  the  banking  sector  had  a  wide 
scope in terms of bank and asset coverage. The 
AQR  covered  all  banks  incorporated  in  Bulgaria. 
Foreign  branches  were  not  included.  The  review 
extended to banks the total balance sheet of which 
amounted  to  EUR  43  billion  as  of  31  December 
the  banking  system.  For 
2015,  or  96%  of 
individual  banks,  the  coverage  of  risk-bearing 
assets,  ranged  from  just  below  40  %  to  nearly  95 
%  depending  on  the  risk  profile  and  level  of 
heterogeneity  of  the  banks'  assets  (BNB,  2016b 
and  2016c).  The  wide  scope  of  the  exercise 
provided  a  very  good  basis  for  a  comprehensive 
screening  of  the  sector.  The  AQR  methodology 
was  largely  based  on  the  one  established  by  the 
ECB  in  the  2014  Comprehensive  Assessment  of 
the euro area banks. (14) 

The AQR and ST exercises were carried out by 
the  Bulgarian  National  Bank.  Unlike  other 
country-specific  banking  reviews  in  the  EU,  the 
Bulgarian  AQR/ST  exercise  was  led  by  the 
banking  supervision  department  of  the  Bulgarian 
National Bank (BNB), with the external consultant 
Deloitte Bulgaria having an advisory, coordinating 
and quality-assurance role. While the strong role of 
the  supervisor  allows  for  more  precise  targeting, 
this  may  have  come  at  the  expense  of  the 
exercise.  Following 
independence 
established 
final 
international  practice, 
publication  provided  results  on  a  bank-by-bank 
basis. However, the level of detail provided did not 
match  that  of  previous  exercises  across  the  EU, 
which  to  some  extent  diminished  the  effort  to 
achieve transparency. 

the 

the 

of 

While  the  corrections  from  the  AQR  were  not 
significant  on  aggregate,  for  two  banks  they 
adjustments 
were 

substantial.  Aggregate 

(14) Deviations from this methodology, generally in view of the 
different  size  and  nature  of  banking  activities  in  Bulgaria 
relative to the euro area, were published by the BNB. 

22 

 
 
                                                           
                                                           
amounted  to  EUR  340  m,  or  1.3 %  of  the  risk-
weighted  assets  of  the  participating  banks.  These 
mainly  reflect  adjustments  to  banks’  corporate 
portfolios, in particular the reclassification of some 
EUR  1.9  bn  of  exposures  as  non-performing (15). 
Additional  adjustments  were  made 
the 
residential  real  estate  portfolios  and  held  assets. 
Corrections  were  heavily  concentrated  in  two 
domestically-owned  banks  –  First  Investment 
Bank (a systemic bank) and Investbank (16), which 
accounted for 79 % of the corrections. As a result, 
the CET1 capital adequacy of the two banks fell to 
5 %  and  6.5 %  respectively,  indicating  that  they 
would  need  to  replenish  their  capital  buffers  (see 
Graph 4.2.1). 

in 

Graph 4.2.1:  Post-AQR capital adequacy, % of risk-

weighted assets 

4.2. Financial sector 

for  more  heterogeneous 

less  accurate 
loan 
portfolios,  such  as  corporate  and  commercial  real 
estate.  For  the  banks  with  significant  corporate 
activity,  this  may  have  underestimated  important 
risk contributors. With the benefit of hindsight, the 
macroeconomic  scenarios  of  the  stress  tests  were 
conservative (for more details, see BNB, 2016a). 

The stress test results indicated that the system 
is  robust  on  aggregate,  but  with  pockets  of 
weaknesses.  The  results  of  the  stress  test  varied 
significantly  across  banks,  attesting  to  differences 
in their business models and in the strength of their 
portfolios.  In  the  baseline  scenario,  the  aggregate 
capital  adequacy  of  the  banking  system  improved 
by  2018, driven  by  the  results of  the  larger  banks 
(see  Graphs  4.2.2  and  4.2.3).  However,  12  out  of 
the  22  banks,  including  two  of  the  biggest  five, 
saw  a  decline  in  their  capital  ratios  indicating 
difficulties  with  generating  profits.  In  the  adverse 
scenario, all banks had lower capital ratios by 2018 
than  in  the  baseline  scenario,  ranging  from  below 
1 % to over 20 % of their respective risk-weighted 
assets  (RWA).  The  majority  of 
impact 
stemmed from credit risk shocks, accentuating the 
banks’  vulnerability  to  the  quality  of  their  loan 
importance  of 
books.  This  underscores 
maintaining  high  capital  buffers,  beyond 
the 
minimum  requirements,  in  particular  for  those 
institutions that showed weaknesses. 

the 

the 

Bulgarian Development Bank (56.2 %, 617mn) omitted for 
presentational reasons. 
Source: BNB (2016b and 2016c) 

Graph 4.2.2:  Bank-by-bankCET1 capital adequacy ratios in 

2018 according to stress test scenarios 

The  design  of  the  stress  tests  had  some 
shortcomings.  Parameters  derived  from  the  AQR 
served as the starting point for the stress tests and 
were  applied  to  guidelines  that  were  centrally 
provided  by  the  project  managers.  Therefore,  the 
stress  tests  were  not  strictly  bottom-up,  which 
would  have  required  banks  to  develop  their  own 
their  capital 
for  projecting 
internal  models 
positions. In 
established 
regard, 
international practice for such exercises is to carry 
out  also  bottom-up  stress  tests.  Top-down  stress-
tests are well suited for retail loan portfolios which 
are more homogeneous. However, this approach is 

this 

the 

Order of banks corresponds to BNB publication 
Source: BNB, European Commission calculations 

(15) Around 5 % of in-scope assets and 9 % of reviewed assets. 
(16) FIB  is  the  largest  domestically-owned  bank  (9.6%  market 
share at end-2016) and Investbank is the third largest (2.1% 
market share). 

23 

0%5%10%15%20%25%30%35%01,0002,0003,0004,0005,0006,000Post-AQR CET1 ratioRisk-weighted assets, EURmnRegulatoryminimum, 4.5%Minimum capital (4.5%) + systemic risk (3%) + capital conservation (2.5%) buffers-10%0%10%20%30%40%50%60%BaselineAdversePost-AQR 
 
                                                           
 
 
4.2. Financial sector 

Graph 4.2.3:  Impact of baseline and adverse scenario of 

stress tests on capital 

of  insurance  companies  and  assets  of  private 
pension  funds.  Additionally,  stress  tests  of  the 
insurance  market  were  done  on  the  post-review 
balance sheets to provide the supervisor with more 
information on potential risks. 

To  ensure  their  credibility,  the  reviews  were 
ambitious  in  scope  and  design.  The  check-up 
covered  the  entire  pension  funds  and  insurance 
markets  and  included  group-level  assessment  for 
insurance  firms.  An  independent  private  sector 
consultant  was  hired  to  design  the  methodologies 
the  process.  A  steering 
and  project-manage 
committee  comprised  of  representatives  of  the 
authorities and EU bodies was appointed to guide 
the  consultant 
Independent 
external  reviewers  were  hired  by  the  reviewed 
entities to perform the field work. 

its  work. (17) 

in 

Axes intercept at aggregate impact for the system. 
Source: BNB, European Commission calculations 

implementation  of 

The effectiveness of the exercise hinges crucially 
follow-up 
on  adequate 
measures.  Such  measures  would  improve  the 
robustness of the institutions and the credibility of 
supervision.  The  two  banks  that  need  to replenish 
their  capital  buffers  on  the  basis  of  the  AQR 
results  received  detailed  instructions  to  do  so  by 
April  2017.  Actions  include  de-risking  of  assets, 
reducing 
risk-weighted  assets,  disposing  of 
foreclosed  and  held  assets,  optimising  costs  and 
raising  fresh  capital.  Institutions  that  showed  a 
significant decline of their capital adequacy in the 
stress  tests  were  asked  to  enhance  their  policies, 
procedures  and  internal  rules  and  to  review  their 
business  plans  in  order  to  enhance  resilience  to 
shocks.  The  results  of  the  stress  tests  will  be 
incorporated into the supervision authority's annual 
review and evaluation process, which may lead to 
specific 
measures. 
additional 
recommendations  arising 
this  process, 
however, have not been made public. 

from 

Any 

company 

individual 

The reviews were completed to a high degree of 
independence  and  transparency.  The  reviews 
and stress tests were finalised in January 2017 and 
the  summary  and  company-specific  results  and 
follow-up  actions  published  on  3  February 
2017. The  level  of  detail  of  the  publication, 
including 
and 
results 
recommendations, 
transparency  and 
increased 
credibility  of  the  work  performed.  The  published 
results  also  provide  supporting  evidence  to  the 
supervisor  to  tackle  any  remaining  issues  not 
covered  by 
actions. 
initial 
Publication  of  the  stress  test  results  would  also 
further  increase  transparency.  The  report  also 
provided  recommendations  by  the  independent 
reviewers  and  the  project  manager  on  legislative 
changes  aimed  at  harmonising  the  Bulgarian 
legislation  with  international  standards  (for  more 
details, see EIOPA, 2017). 

follow-up 

the 

4.2.2.  NON-BANKING FINANCIAL SECTOR * 

Reviews  of  private  pension 
insurance companies 

funds  and 

Independent reviews examined the health of the 
non-bank  financial  sector.  As  part  of  its  plan  to 
address the excessive macroeconomic imbalances, 
the government mandated the non-bank supervisor, 
the  Financial  Supervision  Commission  (FSC),  to 
organise independent reviews of the balance sheets 

Results and follow-up measures 

The insurance sector is overall well-capitalised, 
but  some  capital  shortfalls  were  identified.  
Thirteen  of  the  fifty  insurance  companies,  with 
around a quarter of the market share, did not meet 
the capital requirements on the cut-off date of the 
review,  30  June  2016.  Seven  of  these  companies 
undertook  measures  to  cover  their  financial  needs 

(17) The  steering  committee  included  the  FSC  and  EIOPA  as 
voting  members  with  equal  weight  and  observers  with 
consultative  powers  from  the  EC,  ESMA,  Ministry  of 
Finance and the national central bank. 

24 

-25%-20%-15%-10%-5%0%-25%-15%-5%5%15%25%Baseline scenario impact, %of RWAAdverse scenario impact, % of RWA 
 
                                                           
4.2. Financial sector 

reviewers highlighted important issues for some of 
the funds.  

trading  volume  of 

Risks to the long-term benefits of pension fund 
account  holders  remain  to  be  addressed.  These 
risks include concentration of assets on the traded 
and non-traded domestic market, the low liquidity 
the  domestic  stock 
and 
exchange and the lack of sufficient information on 
exposures  to  related  parties.  All  of  these  risks 
could  have  a  significant  impact  on  the  funds 
available  to  account  holders  during  the  pay-out 
phase,  which  will  start  in  earnest  around  2020. 
Some funds were found not to have proper tools to 
identify  and  monitor  related  parties.  Complex 
ownership  and  cross-ownership  structures  were 
also identified in some cases. Compliance with the 
legal  requirements  is  necessary  but  may  not  be 
enough to ensure the best interest of pension fund 
account  holders.  A  thorough  examination  and 
elimination of those risks remains a key challenge 
for the supervisor. 

4.2.3.   FINANCIAL SECTOR SUPERVISION* 

are 

Supervisory 
divided 
responsibilities 
between  the  BNB  and  the  FSC  but  close 
cooperation  is  essential.  While  the  BNB  is 
responsible  for  the  banking  sector,  the  FSC  is  in 
charge  of  insurance  companies,  private  pension 
funds  and 
the 
authorities  have  undertaken  a  series  of  measures 
aimed  at  improving  financial  sector  supervision. 
Nevertheless,  close  cooperation  between 
the 
supervisors  remains  vital,  especially  to  ensure 
appropriate  group-level  supervision  for  business 
groups operating across the financial market. 

the  capital  market.  Overall, 

The  BNB  has  achieved  some  progress  with  its 
plans  to  reform  banking  supervision.  Despite 
some  delays,  which  also  reflect  the  significant 
resources  allocated  to  the  AQR/ST  exercises,  the 
BNB  Plan  to  ‘Reform  and  Develop  Banking 
Supervision’  is  progressing  (BNB,  2016d).  The 
the  Financial  Sector 
planned 
Assessment  Program  (FSAP)  by  the  IMF  and  the 
World  Bank  is  to  provide  further  guidance  on 
improving  banking 
supervision,  while  also 
reviewing other parts of the financial system. The 
main  challenges  for  banking  supervision  going 
forward  include  dealing  with  related-party  and 
connected  exposures  as  well  as  ensuring  a 

review  under 

before publication of the results and are considered 
by  the  supervisor  to  be  no  longer  in  need  for 
supervisory action. The remaining ones have three 
months  to  comply  with  the  requirements,  while 
two  insurers  will  have  to  do  this  until  the  end  of 
2017,  taking  advantage  of  the  transition  period 
allowed  for  the  change  from  Solvency  I  to  the 
Solvency II regime. Third-party verification of the 
follow-up  measures  and 
implementation 
would further boost confidence in the sector. 

their 

sheet (18). 

impact  on 

Issues  related  to  certain  reinsurance  contracts 
and  group-level  supervision,  remain  to  be 
tackled. According to some reviewers, reinsurance 
recoverables  are  not  properly  valued  on  the 
reviewed  undertakings  balance 
If 
confirmed,  the  resulting  adjustments  could  have  a 
substantial 
the  capital  of  some 
companies  and  may  require  further  follow-up 
actions.  As  the  issue  was  identified  late  in  the 
review process, the share of companies that would 
be  impacted  by  it  remains  to  be  confirmed,  but 
could be substantial in the view of the supervisor. 
Certain  insurance  receivables  may  need  to  be 
impaired  leading  to  further  negative  adjustments. 
Group-level  supervision  was  another  important 
issue  highlighted  by  the  review.  Two  of  the 
insurance  groups,  Eurohold  and  Armeec  Group, 
did  not  complete  the  review  following  disputes 
over  data  availability  and  scope  of  the  review.  
Armeec at the individual level and the subsidiaries 
of Eurohold were among  the thirteen entities with 
full  group-level 
capital 
assessment  would  allow 
to 
supervisor 
appropriately 
In  addition, 
identify  all 
regarding different valuations of the same financial 
instrument  across 
the 
supervisor  only  retained  the  least  conservative 
approach.  A  more  balanced  approach  could  have 
shown  potential  shortcomings  in  the  valuation  of 
balance  sheets  overall,  while  still  ensuring 
consistency.  

insurance  undertakings, 

shortfalls.  Only  a 

the 
risks. 

The  private  pension  funds'  assets  were  subject 
to  only  minor  adjustments.  The  adjustments 
recommended  by  the  reviewers  were  0.3%  of  the 
total pension funds' assets, ranging between 0 and 
3.4%  for  the  individual  funds.  The  adjustments 
were  mostly  from  overvaluation  of  investment 
properties  and  corporate  bonds.  However,  the 

(18) For  details  see  the  detailed  final  report  on  EIOPA's 

website. 

25 

 
                                                           
4.2. Financial sector 

supervised 

undertaking.  Given 

actions  against  the  supervisor's  decisions.  This 
leads to the suspension of supervisory action until 
a  final  decision  is  reached  by  the  court,  after  all 
possible  ways  of  appeal  have  been  exhausted  by 
the 
the 
shortcomings  of  the  judicial  system  (see  Section 
4.6.3),  this  legal  process  often  invalidates  the 
supervisory  decision  regardless  of  the  final  court 
verdict.  Additionally, 
supervisory 
resources  from  the  day-to-day  operation  of  the 
FSC. The weak judicial system also disincentivises 
conservative supervisory action  due to the higher 
risk  of  personal  liability  when  defending  against 
claims  for  damages  brought  by  the  supervised 
entities. 

it  drains 

4.2.4.  CORPORATE INDEBTEDNESS AND 

DELEVERAGING* 

The orderly deleveraging process is continuing, 
but high corporate debt remains a concern. The 
debt  of  non-financial  corporates  (NFC)  has  been 
declining  since  2013.  In  2015,  it  decisively 
decreased  by  11.7  percentage  points  (pps.)  to 
around  89 %  of  GDP  especially  on  the  back  of 
reduced  cross-border  intra-company  loans  by  a 
very  few  NFCs  and  strong  economic  growth 
(Graph 4.2.4). A slow and orderly deleveraging of 
household  debt  has  also  continued  in 2015 with  a 
1.4  pps.  drop  to  21.7 %  of  GDP  (European 
Commission, 2015c).  

Graph 4.2.4:  Private debt breakdown 

conservative  approach 
assets (19). 

towards  hard-to-value 

a 

the  supervisor 
system  of 

Non-bank  financial  supervision  mainly  follows 
a compliance-based approach without sufficient 
focus  on  risks.  Moving  to  a  more  risk-based 
to 
supervision  would  require 
risk 
comprehensive 
develop 
characteristics  on  both  assets  and 
liabilities, 
including,  in  the  case  of  insurers,  risks  associated 
with the insurance contracts sold. This would also 
imply  an  objective  evaluation  of  the  adequacy  of 
entails 
firms’ 
understanding  and  challenging  the  data,  having  a 
forward-looking 
taking 
perspective 
appropriate  action  to  mitigate  and/or  minimize 
current and future problems (i.e. focusing not only 
on  what  went  wrong  but  also  on  what  can  go 
wrong). 

risk  management. 

This 

and 

structure 

The  available  human,  financial  and  technical 
resources  may  be  insufficient  to  support  a  new 
supervisory  approach.  In  the  early  stages  of 
organising  the  non-banking  sector  reviews,  the 
showed 
supervisor's  organisational 
certain weaknesses in terms of the responsibilities 
of the chair, deputy chairs and the governing board 
(20).  Those  weaknesses  have  created  uncertainty 
among  market  participants  and  threatened  to 
undermine the review process. Transparency in the 
decision-making process has been lacking in some 
instances,  raising  concerns  about  operational 
independence  as  regards  political  interference  or 
inappropriate  influence  from  the  financial  sector 
itself. 

supervisor 

The  legal  framework,  under  which  the  non-
appears 
banking 
inadequate  to  allow  for  a  high-quality  market 
oversight.  The  current 
legislation  provides 
incentives  for  the  supervised  entities  to  take  legal 

operates, 

(19) Hard-to-value  assets  include  exposures  to  real  estate  or 
other assets whose value is difficult to establish either due 
to  their  specific  nature  (meaning  there  are  few  similar 
assets  to  benchmark  against)  or  to  the  lack  of  an  active 
market. This  may  create a  mismatch between the value of 
the asset on the balance sheet and its actual value, posing a 
risk  for  the  capital  adequacy  of  a  bank.  Moreover,  the 
management  of  such  assets  is  usually  costly.  As  a  result, 
balance sheet risk may even exceed the invested amount. 
(20) E.g.  for  replacing  members  after  mandates  have  expired, 
full 
the  undertakings  supervised  or 
the  review 

ensuring 
independence 
adopting  consistent  positions 
process. 

swift  decision  making,  guaranteeing 

throughout 

from 

Source: European Commission 

26 

02040608010012014016006070809101112131415% of GDPNon-financial corporationsHouseholds 
                                                           
 
 
4.2. Financial sector 

Persistently negative inflation and high leverage 
have been challenges for NFCs. Declining prices 
have put pressure on corporate revenues and their 
ability  to  service  outstanding  debt.  While  annual 
inflation  remained  in  negative  territory  in  2016 
with -1.3 %, the projected pick up in 2017 to 0.8 % 
by  year-end  (see  Section  1)  would  help  NFC 

revenues. At the same time, high leverage, despite 
a  decreasing  trend  in  recent  years,  continues  to 
hamper the debt servicing capacity of many NFCs. 
Furthermore,  profitability  remains  weak  in  many 
sectors, especially those (such as construction/real 
estate)  which  were  significantly  affected  by  the 
crisis  (Graph  4.2.5).  The  high  degree  of  SOE 

27 

Box 4.2.1: Corporate Indebtedness and Non-performing Loans (NPLs)The NPL ratio remains high in spite of the recent positive trend. After deteriorating significantly in the aftermath of the 2009 recession, asset quality in banks has been on a slow recovery path. NPLs as a proportion of all loans gradually improved to 11.1 % at end-2016, still well above the EU-average. The problem is somewhat mitigated by high capital buffers, strong loan-loss provisioning and ample liquidity in the banking system (see section 4.2.1). In addition, the stock of NPLs as a percentage of GDP (8.4 % in 2016) is smaller compared to Member States with high NPL ratios due to the relatively small size of the banking sector.  The quality of loans to non-financial corporations (NFCs) remains a concern. The ratio of corporate NPLs is still significantly worse than the aggregate, standing at 15.1 % at end-2016. The stock of corporate NPLs stood at BGN 5.4bn (EUR 2.76bn), over 90 % of which represent legacy exposures. Most of these are loans to large corporates, which banks have not been able to work out or dispose of. Even if the ratio of bad loans is trending down, the additional stock uncovered by the AQR (see Section 4.2) suggests that addressing the high corporate NPL stock will remain an obstacle for the banking system and the economy as a whole. A number of obstacles hinder the decline of the corporate NPL stock. The insolvency framework reform has not yet been adopted by parliament, preventing banks from utilizing new procedures such as out-of-court debt restructuring or fast track court approvals of pre-agreed restructuring agreements (see section 4.6.3). While the secondary market for non-collateralised consumer NPLs is relatively active, partly due to the AQR, in other segments it remains dormant, reflecting a still-sizeable price gap. However, an inefficient insolvency framework and an incomplete credit registry, prevent a swift closure of the price gap. A stronger internal restructuring capacity of banks (including on related party and connected exposures), as well as a more liquid market for sales of SME and mortgage NPLs could facilitate writing-off the NPL stock and help the restructuring of viable businesses. A high NPL level has a negative impact on both the banking system and the overall economy. The high rate of NPLs can have a negative impact on the real economy. It may limit investment and consumption and constrain the recovery of asset prices (IMF, 2015). While most banks are willing to lend at competitive rates to high quality clients, they are less likely to lend to debtors, especially in industries still burdened by high levels of indebtedness. Thus, lower NPL levels may prompt banks to become less risk averse, which could potentially result in higher credit growth and private sector investment. Overall, lower levels of corporate NPLs on banks’ balance sheets as well as a continuing deleveraging of NFCs could contribute to reduce the remaining fragilities of the banking system and to fostering sustainable medium-term economic growth. Cross-country experience in Europe has shown that prudential NPL measures such as time limits or write-down targets can accelerate banks’ NPL work out (1).                                                             (1) IMF (2015). See also the work of the SSM NPL working group.   
 
 
 
 
 
 
4.2. Financial sector 

corporate 

contingent 
liabilities 
indebtedness challenges (see Section 1). 

adds 

to 

Lowering corporate indebtedness is constrained 
by  a  number  of  factors.  The  pace  of  private 
sector  deleveraging  and  NFC's  still  high  level  of 
debt  continue  to  be  hampered  by  limited  progress 
insolvency  framework  (see 
in  reforming 
Section 
insolvency 
framework,  a  deeper  secondary  market  for  NPLs, 
as  well  as  assertive  supervisory  efforts  could  be 
beneficial  for  banks  to  reduce  their  still  high 
corporate NPL levels (see Box 4.2.1). 

the 
4.6.3).  A 

functioning 

Graph 4.2.5:  Interest coverage, distribution by sector, 2015 

Note: EBITDA (earnings before interests, taxes, depreciation 
and amortisation) divided by interest charges 
Source: Orbis, European Commission calculations 

28 

020406080100interest coverage ratio <00-11-22-3>3 
 
4.3.  LABOUR MARKET, EDUCATION, HEALTH AND SOCIAL 

POLICIES 

Graph 4.3.1:  Employment by sector, year-on-year changes 

4.3.1.  LABOUR MARKET DEVELOPMENTS 

Overview and challenges 

The  labour  market  is  slowly  improving,  but  it 
still faces structural challenges (see Section 1 for 
recent trends). Bulgaria faces adverse demographic 
developments, as well as structural problems such 
as  high  long-term  unemployment  and  inactivity, 
and  the  limited  inclusion  of  young  people  in  the 
labour  market.  Labour  mismatches  of  skills, 
sectors  and  regions,  insufficiently  targeted  active 
labour market policies (ALMPs), limited provision 
of quality education and social disparities represent 
further challenges. 

slowly.  Low 

in  employment 
skilled 

is  only 
A  sectoral  shift 
progressing 
in 
jobs 
agriculture  and  construction  are  being  lost,  while 
most new jobs are being created in services (Graph 
4.3.1).  This  sectoral  shift  is  making  only  a  weak 
contribution  to  economic  growth,  as  employment 
in  services  increased  mostly  in  lower productivity 
sectors.  Although  it  is  declining,  employment  in 
agriculture remains high (around 19 % versus 5 % 
the  EU  for  2015)  and  conceals  hidden 
in 
unemployment.  A 
in 
further 
employment to high productivity sectors would be 
paramount for income convergence. 

sectoral 

shift 

Companies  report  difficulties  in  hiring  people 
with  the  right  skills  but  also  unskilled  workers 
(see  Manpower  Group,  2016,  and  European 
Commission,  2016d).  Some  of  these  difficulties 
may relate to the declining working age population 
(see  Section  1),  unattractive  working  conditions 
and  higher  wages  abroad.  The  overall  skills  level 
has  been  improving  given  the  increase  in  tertiary 
education  attainment  rates  to  32.1 %  in  2015 
versus  the  EU  2020  national  target  of  36 %. 
However,  the  participation  in  lifelong  learning  is 
among the lowest in the EU, therefore limiting the 
opportunities for re- and upskilling. The low level 
of  digital  skills (see  Section  4.4  and  European 
Commission,  2015b)  together  with  low  labour 
mobility  might  exacerbate  regional  and  skills 
mismatches  in  the  labour  market.  An  increase  in 
early school leaving is an additional concern. 

Source: European Commission 

Different  types  of  mismatches  contribute  to 
weak  labour  market  outcomes  in  Bulgaria. 
Employment  and  unemployment  rates  diverge 
strongly  across  education  levels,  which  points  to 
substantial  skills  mismatch  (21) (See  Graph  4.3.2). 
While  the  upskilling  of  the  population  means  this 
mismatch is gradually declining, it remains among 
the  highest  in  the  EU.  Considerable  rural-urban 
employment  and  unemployment  rate  gaps  (22) 
point  to  a  regional  labour  market  mismatch. 
ALMPs to address this challenge are being applied 
by  Bulgarian  authorities,  but  their  scale  is  still 
limited.  There  are  also  sectoral  mismatches, 
indicating  weak  mobility  across  sectors.  For 
instance,  a  high  proportion  of  the  unemployed 
formerly  worked  in  the  construction  sector,  while 
the 
shortages  are 
types  of 
manufacturing  sector.  The  different 
mismatches  suggest  further  scope  for  improving 
the effectiveness of ALMPs. 

increasingly  being  felt 

in 

(21) Unemployment  among  individuals  with  tertiary  education 
stood  at  4.0 % 
the  EU  average. 
in  2015,  below 
Unemployment  among  individuals  with  medium  and  low 
education was twice and six times this level, respectively. 
(22) The rural-urban unemployment rate gap (age group 15+) is 
one of the highest in the EU28 and has been increasing. It 
stood at 92 % in 2015, as compared to -10 % in the EU28. 

29 

-250-200-150-100-50050100150200*1000 personsAgricultureIndustryConstructionTradable servicesNon-tradable servicesPublic sectorTotal 
 
 
                                                           
4.3. Labour market, education, health and social policies 

maintain  their  support  for  the  MSSTs.  Following 
the  failure  of  the  negotiations,  the  government 
decided  to  apply  to  2017  the  2016  MSSTs  levels. 
Some  MSSTs,  however,  increased  further  due  to 
the increase of the minimum wage in 2017, which 
acts as a floor for the MSSTs thresholds. 

Long-term unemployment 

large 

Bulgaria  has  the  potential  to  tap  into  its 
relatively 
inactive  population.  The 
proportion  of  the  inactive  population  is  above  the 
EU  average,  making  it  an  important  potential 
contributor  to  the  labour  force  (Graph  4.3.3). 
Compared to the EU average, the inactivity rate for 
men  is  disproportionally  higher  than  for  women, 
and particularly so for the low-skilled.  

Graph 4.3.3:  Increasing distance from the labour market * 

* People from 20 to 64 years as percentage of total 
population in q2 2016 
**Part-time workers who would like to work additional hours 
and are available to do so. 
*** Persons available to work but not seeking 
**** Inactive people on top of discouraged workers 
Source: European Commission 

The  share  of  long-term  unemployment  in  total 
unemployment  remained  about  60 %  in  2016. 
Long-term  unemployment  (LTU)  is  especially 
high for the low-skilled (Graph 4.3.4), which face 
significant  labour  market  integration  challenges. 
The  average  rate  of  participation  of  the  registered 
long-term  unemployed  in  active  labour  market 
policies is also very low (3.9 % in 2014), although 
it  started  to  increase  following  outreach  measures 
by the Employment Agency. 

Graph 4.3.2:  Relative dispersion of employment rates by 

education level, 2010, 2014 and 2015 

Three education levels are considered: those with low 
education (less than upper-secondary), medium education 
(upper secondary or post-secondary) and those with tertiary 
education. 
Annual average based on the average of four quarters. 
Source: European Commission 

the 

labour  market, 
improved 
Despite 
vulnerable  groups 
face  employment 
still 
challenges.  Particularly  affected  are  low-skilled 
workers (with a much higher unemployment rate), 
those  working  in  agriculture  (many  of  whom  are 
unremunerated  family  workers),  and  in  general 
those  working  in  rural  areas.  The  employment 
prospects for Roma remain precarious. 

social 

Minimum  wage  decisions  are  not  based  on  a 
transparent mechanism that takes into account 
economic  and 
fundamentals.  This 
generates  a  risk  of  not  ensuring  a  proper  balance 
between  the  objectives  of  supporting  employment 
and  competitiveness,  while  safeguarding  labour 
income. Recent progress in designing a mechanism 
for  setting  the  minimum  wage  has  been  rather 
modest, as the criteria to be used have been agreed 
in  principle  by  the  social  partners,  but  not  their 
weight  or  application.  The  uncertainty  created  by 
the  lack  of  such  a  mechanism  adversely  impacts 
the predictability of business conditions.  

the 

show 

(MSSTs) 

Failed negotiations on minimum social security 
thresholds 
system’s 
shortcomings. Failed negotiations on the MSSTs, 
which  had  been  introduced  in  2003  to  combat 
wage  underreporting,  highlight  a  deteriorating 
social dialogue. Negotiations on the MSSTs broke 
down after employers refused to participate in the 
discussions.  Trade  unions  and  the  government 

30 

0.00.10.20.3UKPTATNLEEDKDELVSICZSEFIELEU28LUROCYPLESFRMTHRHUSKITLTIEBGBE2015201420100510152025BGEUBGEUBGEUBGEUUnderemployedpart-time workers**UnemployedDiscouragedworkers***Other inactivepeople****%Increasing distance from the labour market 
 
 
4.3. Labour market, education, health and social policies 

Graph 4.3.4:  Long-term unemployment rate by educational 

attainment 

Source: European Commission 

training 

Young  people  continue  to  face  employment 
challenges.  The  rate  of  young  people  not  in 
employment,  education  or 
(NEET) 
remains  well  above  the  EU  average,  despite  the 
the  Youth  Guarantee.  In 
implementation  of 
addition,  a 
large  majority  of  NEET  remain 
inactive, thus indicating structural problems in the 
inclusion of young people in the labour market or 
in  education  (Eurofound,  2016).  The  NEET  rate 
among  Roma  is  very  high,  particularly  for  girls. 
The  Youth  Guarantee  is  being  implemented. 
Measures  so  far  have  focused  on  young  people 
with secondary and tertiary education and had only 
a  limited  impact  on  the  low-skilled.  Recent 
measures  by  Bulgarian  authorities  seem  to  have 
started  addressing  this  challenge.  The  Youth 
Guarantee  is  further  hampered  by  very  low 
registration  rates  with  the  Public  Employment 
Services. 

impact 

of  parenthood  on 

The 
female 
employment is high (23). This is mainly due to the 
unbalanced uptake of leave arrangements between 
women  and  men,  and  low  provision  of  childcare 
Poor  families 
in  rural  areas  are  particularly 
affected (World Bank, 2017). The recently adopted 
reform to introduce financial incentives for women 
who return earlier from parental leave may help to 
increase their employment.  

Roma  are  still  one  of  the  most  disadvantaged 
groups  in  the  labour  market.  A  survey  showed 
that  only  26 %  of  Roma  aged  20-64  reported  to 
have engaged in ‘paid work’, while 55 % of Roma 
reported  being  unemployed  (FRA,  2016).  The 
employment prospects of Roma remain precarious, 
mainly  due  to  their  low  qualifications,  social 
(FRA,  2016). 
exclusion  and  discrimination 
According  to  the  Ministry  of  Labour  and  Social 
Policy,  the  inclusion  of  Roma  in  professional 
trainings 
Increasing 
the employment prospects of the Roma population 
remains  essential  for  economic  growth  especially 
in light of labour force shortages and an increasing 
share of Roma in the labour force.  

very 

low. 

also 

is 

Labour market policies  

Poorly  targeted  active  labour  market  policies 
mainly  focus  on  demand-side  measures.  Direct 
job  creation  continued  to  account  for  the  bulk  of 
active  labour  market  policies  spending  with  74 % 
in 
remain 
underfinanced.  In  particular,  training  programmes 
for  the  unemployed  are  insufficiently  developed 
and  target predominantly  the  unemployed  that are 
easier to activate.  

Supply-side  measures 

2014. 

Labour force participation is still hampered by 
high  undeclared  work.  Informal  employment 
includes  work  without  a  formal  contract,  but  also 
under-reported remuneration (‘envelope wages’) or 
evasion of social security contributions. Available 
information  suggests  that  undeclared  work  has 
recently increased again (24).Preventative measures 
to tackle undeclared work are limited. 

The  public  employment  services  continue  to 
pursue  targeted  reforms.  The  reform  of  the 
public employment services has been supported by 
technical experts from several EU Member States. 
Enhanced  IT  capability,  increasing  use  of  call-
centre  services,  and  closer  coordination  between 
public  employment  services  and  social  service 
providers are being explored. 

Integrated  employment  support  and  social 
assistance centres are being developed. Bulgaria 
initiated  a  pilot  project  to  introduce  integrated 

(23) There  is  a  14.1  pp.  difference  between  the  employment 
rates  of  women  with  at  least  one  child  under  six  and 
women with no children. 

(24) The Labour Force Survey shows an increase in the number 
of  people  who  have  identified  themselves  as  being  hired 
without a contract (from 37500 in 2012 to 50900 in 2015). 

31 

0510152025% of labour force 20-64High skilledMedium skilledLow skilled 
 
                                                           
                                                           
4.3. Labour market, education, health and social policies 

Graph 4.3.5:  At-risk-of-poverty or social exclusion rate and 
its components (AROP, SMD, LWI) 

Centres for Employment and Social Assistance and 
plans  to  add  8  new  centres  in  remote  areas  to  the 
existing  65.  Many  unemployed  people  have 
already  been  serviced  by  these  centres.  The 
working  methods  between 
the  Employment 
Agency and the Agency for Social Assistance have 
improved. However, there is a limited provision of 
long-term 
social 
unemployed  taking  a  job,  as  local  municipalities 
—  the  main  social  service  providers  —  have  not 
been involved in the pilot. 

services 

support 

the 

to 

Several  measures  have  been  taken  to  improve 
labour  market  participation.  Support 
for 
changing the place of residence was introduced to 
enhance  labour  market  mobility  (25).  One  day 
contracts, aimed at combating undeclared work in 
agriculture,  are  being  more  extensively  used  by 
employers.  In  addition,  measures  to  lower  the 
NEET  rate  were  continued.  Specific  measures 
were  also  maintained  to  address  the  long-term 
unemployment,  including  subsidised  employment 
and literacy and qualification courses. 

4.3.2.  POVERTY AND SOCIAL EXCLUSION 

Poverty 

The  at-risk-of-poverty-or-social-exclusion  rate 
remains the highest in the EU. The rate reached 
41 %  in  2015,  due  to  a  worsening  of  both 
(26)  and  severe  material 
monetary  poverty 
deprivation  (Graph  4.3.5).  For  instance,  in  2015, 
monetary  poverty  was  highest  among 
the 
unemployed  with  53.3%.  Income  inequalities  are 
also very high and increasing (see Section 1). 

Source: European Commission 

Poverty  and  social  exclusion  are  particularly 
high  among  the  Roma.  The  at-risk-of-poverty 
rate  of  Roma  is  approximately  four  times  as  high 
as for the overall population. This compares with a 
set of peer countries (RO, CZ, HU, SK), where the 
rate  of  poverty  for  Roma  ranges  from  three-  to 
more  than  six-times  higher  than  for  the  general 
population  (FRA,  2016)  (27).  Monetary  poverty  is 
particularly  high  among  the  Roma,  which  has  an 
impact,  among  other  things,  on  their  dire  housing 
situation (28). The intergenerational transmission of 
poverty  is  a  further  concern.  The  implementation 
of  the  National  Roma  Integration  Strategy  is 
lagging  behind  at  the  national  and  local  levels,  in 
particular 
the  coordination  of  actions  across 
sectors. 

Poverty  among 
the  elderly  has  abruptly 
worsened.  Following  a  continuous  decline  over 
the  past  5  years,  the  at-risk-of-poverty  rate  of  the 
elderly (65+) increased sharply to 31.7 % in 2015. 
Elderly  women  are  at  a  particularly  high  risk  of 

(25) The unemployed are reimbursed for rent, kindergarten and 
internet fees when they move more than 50 km away from 
their place of residence to take up a job. 

(26) People  are  considered  at  risk  of  monetary  poverty  when 
their  disposable  income  after  social  transfers  is  below  the 
at-risk-of-poverty  threshold.  The  EU  2020  national  target 
envisages  a  reduction  of  monetary  poverty  by  260,000 
people  as  compared  to  the  2008  baseline.  In  2015,  there 
were 46,000 less people in monetary poverty than in 2008.  

(27) The  2015  survey  by  the  European  Union  Agency  for 
Fundamental  Rights  (FRA)  improved  the  sampling  and 
weighting  methods  developed  for  the  2011  survey.  As 
such,  the  results  are  a  more  accurate  representation  of  the 
situation of Roma in the countries covered. The indicators 
used are a close approximation to those applied in standard 
full 
European  surveys 
comparability was not intended.  

(EU  SILC,  EU  LFS)  but 

(28) E.g.  65 %  of  housing  lacks  basic  sanitation,  19  pp.  above 
the  average  of  the  nine  countries  covered  by  the  FRA 
survey. 

32 

01020304050607006070809101112131415% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households 
                                                           
 
                                                           
4.3. Labour market, education, health and social policies 

poverty  or  social  exclusion  given  their  typically 
lower pension contribution period.  

the  social  benefits  undermines 

revising 
their 
adequacy  over  time  and  creates  a  risk  of  large 
unbudgeted ad hoc revisions. 

On a positive note, the relative poverty situation 
of children has improved. The risk of poverty or 
social  exclusion  for  children  dropped  to  25 %  in 
2015. However, it remains one of the highest in the 
EU and is strongly linked to the educational level 
of the parents. 

Social policy 

The  social  transfer  system  is  limited  by  its  low 
adequacy  and  coverage.  Bulgaria  has  one  of  the 
least-effective social transfer system in the EU and 
one of the lowest levels of social transfers (Graph 
4.3.6). The government spent just 0.2 % of GDP in 
2015  on  monthly  social  benefits  and  the  heating 
allowance,  which  is  the  core  of  the  minimum 
income  scheme.  The  eligibility  rules  are  very 
restrictive,  leaving  many  poor  families  without 
support.  The  limited  coverage  of  the  minimum 
income also reduces access to health insurance for 
poor  people  who  rely  on  the  state  for  access  to 
healthcare services.  

Graph 4.3.6:  Reduction in the risk of poverty after social 
transfers (excluding pensions) 

Percentage difference between the at-risk-of-poverty rate 
before and after social transfers 
Source: European Commission 

The  general  minimum  income  has  not  been 
updated  since  2009.  This  has  eroded 
the 
social  benefits  and 
protection  capacity  of 
contributed  to  increased  inequality  in  the  country. 
A  lack  of  a  predictable  mechanism  for  regularly 

increase 

the  coverage  of 

Limited  measures  have  been  taken  to  increase 
the coverage and adequacy of minimum income 
schemes.  To 
the 
minimum income schemes, people can now apply 
for  benefits  irrespective  of  the  place  of  residence. 
Earnings  from  one  day  and  dual  education 
contracts will be excluded from the means testing. 
A  new  benefit  for  children  with  disabilities  has 
been introduced as from 2017. Heating benefits for 
the  2016/2017  winter  season  were  increased  to 
compensate  for  the  rising  price  of  electricity. 
However,  these  measures  do  not  fundamentally 
change the system nor allow for the benefits to be 
updated  in  a  predictable  way  which  would  allow 
them to keep their safety net function. 

Social services do not fully meet the needs of the 
most  vulnerable  groups.  These  groups  include 
Roma, people with disabilities, or people living in 
rural  areas.  The  lack  of  support  from  the  social 
services  often  hinders  the  employability  of  the 
vulnerable.  Limited  coordination  between 
the 
social  and  health  parts  of  long-term  care  systems 
weighs  down  on  the  quality  and  capacity  to 
provide services. 

Access  to  adequate  and  affordable  housing 
remains  a  challenge  for  vulnerable  people, 
despite  some  improvements.  Severe  housing 
deprivation for poor people is more than twice the 
EU average and access to social housing is limited. 
Bulgaria  has  the  highest  proportion  in  the  EU  of 
those  who  cannot  keep  their  lodgings  adequately 
warm.  

Legislative changes for social services are being 
prepared.  A  new  Social  Services  Law  is  under 
preparation, which aims to better integrate services 
and  budgets  and  to  introduce  quality  standards. 
The  authorities  are  also  reforming  the  disability 
system  to  separate  the  medical  and  employability 
people. 
assessments 
Deinstitutionalisation  has  advanced  for  children 
but  is  lagging  behind  for  adults  (See  European 
Commission, 2016e). 

disabled 

of 

33 

051015202530354006070809101112131415EU27BG% 
 
4.3. Labour market, education, health and social policies 

students will be instrumental to the success of this 
reform.  

Early school leaving is rising with consequences 
for  the  labour  market.  Early  school  leaving 
increased  to  13.4 %  in  2015  (above  the  national 
EU  2020  target  of  11 %)  amid  high  regional 
is 
variations  and  urban-rural  disparities. 
particularly high among Roma (30). Socioeconomic 
factors, educational difficulties and family reasons 
are  key  drivers  of  early  school  leaving.  EU  funds 
are  used  to  provide  second  chance  education, 
literacy  courses  and  qualifications  to  adults  who 
dropped out from school. A strategy to tackle this 
phenomenon is under implementation. 

It 

leads 

low.  This 

Roma  are  particularly  exposed  to  educational 
poverty  and  face  barriers  to  equal  educational 
opportunities. The participation of Roma in early 
education  remains 
to  poor 
language  skills  and  educational  performance, 
increasing their risk of drop-out. Roma segregation 
in  education,  partly  stemming  from  uneven 
distribution  of  Roma  population  in  the  country, 
remains  a  further  challenge  in  accessing  quality 
(31).  The  Pre-School  and  School 
education 
Education  Act  prohibits  the  formation  of  separate 
classes  based  on  ethnicity,  but  monitoring  and 
implementation remains challenging. National and 
EU-funded  measures  currently  in  place  include 
scholarships  and  extracurricular  activities  for 
Roma pupils. 

The  quality  of  vocational  education  and 
training  remains  low.  EU  funding  is  supporting 
the  development  of  vocational  education  and 
training  systems  to  improve,  inter  alia,  quality 
assurance  and  guidance.  The  authorities  also  plan 
to  deepen  the  partnerships  between  vocational 
education  and  training  and  businesses.  Following 
the  Swiss  and  German  models,  Bulgaria  has 
introduced  apprenticeships  (dual  trainings)  on  a 
pilot basis. 

(30) A recent survey by the FRA estimates that 67 % of Roma 
are  early  school  leavers,  about  the  average  for  the  nine 
countries covered (FRA, 2016). 

(31) 60 % of Roma children aged 6-15 attend schools in which 
all  or  most  students  are  Roma,  according  the  FRA  (FRA, 
2016). Using a different methodology, the Roma Inclusion 
Index  2015  estimated  that  26 %  of  Roma  children  receive 
education  in  de  facto  segregated  schools  (Roma  Decade, 
2015). 

4.3.3.  EDUCATION AND SKILLS 

A high proportion of students do not possess an 
adequate  level  of  basic  skills.  The  2015  OECD 
Programme  for  International  Student  Assessment 
(PISA)  found  high  levels  of  underachievement  in 
basic skills (29). The proportion of under-achievers 
in all three tested subjects is among the highest in 
the  EU  and  around  double  the  EU  averages.  The 
education  system 
inequitable,  with 
is  highly 
around  60 %  or  more  of  students  from  the  poorer 
socioeconomic  quarter  failing 
the 
minimum level of skills in PISA (compared to 17-
socio-economic  quarter). 
20 % 
in 
Underachievement 
the 
fairly  high  across 
socioeconomic spectrum, and the proportion of top 
performers  is  low.  This  shows  the  important  role 
that  the  ongoing  education  reform  may  play  in 
improving quality and competence-based learning. 

to  achieve 

top 

the 

is 

Insufficient  provision  of  quality  education  and 
low  funding  remain  major  challenges.  To 
increase  quality,  the  school  curricula  are  being 
updated  and  plans  are  being  developed  to  set  up 
school  performance  indicators.  In  addition,  all 
schools  are  to  be  inspected  every  5  years  by  the 
newly  established  National  Schools  Inspectorate. 
There 
is  not  yet  a  methodology  on  school 
financing,  based  on  performance  and  supporting 
equitable  outcomes.  Spending  on  education 
remains below the EU average with 4.1 % of GDP 
in 2014 (versus the EU average of 4.9 %). 

Performance-based  funding  may  improve  the 
quality  and  labour  market  relevance  of  higher 
education.  In  2016,  29.8 %  of  public  funding  for 
higher education was allocated on the basis of the 
quality  and  labour  market  relevance  of  study 
programmes.  This  proportion  is  expected  to  reach 
60 %  by  2020.  A  total  of  32  priority  fields 
including  science,  technology,  engineering  and 
mathematics  programmes  will  receive  additional 
funding.  The  financial  sustainability  of  higher 
education  institutions  is  important  in  view  of  the 
planned  high  proportion  of  performance-based 
funding. Increasing quality in school education and 
for  secondary 
strengthening  career  guidance 

(29) The Pisa study  (OECD, 2015) found that 42 % of 15-year 
olds  are  functionally  illiterate,  42 %  have  an  insufficient 
level of skills in mathematics, and 38 % are low-achievers 
in science. 

34 

 
                                                           
                                                           
4.3. Labour market, education, health and social policies 

2016).  Moreover, 

The  ineffective  healthcare  system  probably 
contributes to one of the highest mortality rates 
in the EU. Life expectancy is among the worst in 
the EU (European Commission and the Economic 
Policy  Committee, 
the 
circulatory  system  mortality  is  the  highest  in  the 
EU. Infant, perinatal and amenable mortalities also 
remain  high  above  the  EU  average  for  2014. 
Preventable  and  cancer  mortalities  in  Bulgaria 
increased  against  the  EU  average  in  2010-2014. 
Premature  mortality  due  to  non-communicable 
diseases  is  among  the  highest  in  the  EU,  at  twice 
the EU average level. 

4.3.4.  HEALTHCARE  

Low public health care spending is a challenge. 
Public  spending  on  healthcare  remains  very  low, 
covering  only  51.6 %  of  total  health  expenditure. 
The EU average is 76.2 %. Against this backdrop, 
health  is  one  of  the  top  priorities  in  the  2017 
budget.  

Low  coverage  of  health  insurance  restricts 
access  to  healthcare.  According  to  the  latest 
available  data,  only  88 %  of  the  population  is 
covered  by  public  health  insurance  (only  45 %  of 
Roma  according 
to  FRA,  2016)  (OECD/EU 
(2016); EU: 98 %), compromising the efficiency of 
the  system  (32).  Overall, 
the  percentage  of 
Bulgarians reporting unmet medical needs because 
of  cost,  distance  and  waiting  time  remains  well 
above the EU average. Moreover, some long-term 
unemployed  only  have  access  to  hospital  care 
financed by the state, while the prevalence of out-
of-pocket payments and the low public coverage of 
outpatient  medical  services  make  it  difficult  for 
some  people  to  access  healthcare.  Access  to 
pharmaceuticals  is  also  difficult  in  parts  of  the 
country. 

The  hospital-centred  health  system  has  scope 
for  improvement.  The  ratio  of  hospital  beds  and 
the  proportion  of  in-patient  expenditure  are  well 
above  the  EU  average  (33).  Recent  measures  such 
as a selective contracting of hospital services based 
on the National Health Map could be beneficial.  

Each  year  according  to  the  Bulgarian  Medical 
Association,  the  number  of  doctors  emigrating 
equates  to  almost  90 %  of  the  number  of 
medical graduates. Though the ratio of physicians 
to  the  population  is  still  higher  than  the  EU 
average, the outflow and ageing of physicians has 
resulted  in  insufficient  doctor  coverage  in  some 
fields and regions. The shortage of nurses (half the 
EU  average  ratio)  is  also  a  significant  problem 
especially in the light of the emigration trends. 

tend 

insurance 

(32) People  without  health 

to  use  more 
expensive emergency hospital services. In addition, they do 
not participate in prevention and promotion activities. 
(33) In  2014,  there  were  593  acute  care  hospital  beds  per 
100 000  inhabitants,  50 %  above  the  EU  average.  The 
share of in-patient expenditure declined in recent years, but 
remains above EU average (32 % versus 27 %). 

35 

 
                                                           
4.4. INVESTMENT 

4.4.1.  EXTERNAL COMPETITIVENESS  

Graph 4.4.1:  Decomposition of Unit Labour Costs (ULC) 

The  trade  balance  has  been  improving  but  is 
forecast  to  gradually  decline  over  the  coming 
years.  Export  demand  from  EU  trading  partners 
has  been  stable,  while  tourism  exports  helped  to 
contribute  to  a  narrowing  of  the  trade  deficit  (see 
Section  1).  While  the  trade  deficit  for  goods  is 
estimated to have been 4.7 % of GDP in 2016, it is 
more  than  compensated  by  the  strong  services 
trade surplus (expected to have been 6.4 % of GDP 
in  2016).  Going  forward,  higher  import  growth 
mainly  driven  by  buoyant  domestic  demand  and 
rising  energy  costs  is  expected  to  lead  to  a 
deteriorating  trade  balance  of  goods  while  the 
surplus  in  the  services  trade  is  projected  to 
moderately further increase (see Section 1).  

Rapid  wage  increases  have  not  yet  translated 
into  deteriorating  external  competitiveness. 
Rapid  wage  increases  (Graph  4.4.1)  reflect  a 
tightening  labour  market  due  to  the  cyclical 
improvement  of 
the  economy  and  structural 
weaknesses  affecting  labour  supply  (see  Section 
4.3).  However,  in  the  short-  to  medium-  term, 
manufacturing  industries,  the  bulk  of  exporters, 
tend  to  have  relatively  low  sensitivity  to  cost 
changes.  They  are  strongly  integrated  in  global 
value  chains  and  still  benefit  from  the  relatively 
low  wage  levels  associated  with  a  catching  up 
economy  (Bulgarian  National  Bank,  2016a).  The 
recent  stabilization  of  the  real  effective  exchange 
rate (REER) also helped (Graph 4.4.2). 

and 

ageing, 

emigration 

In the medium- to long-term, the labour market 
conditions  will  impact  on  investment  decisions. 
Demographic 
skill 
mismatches  (see  Section  4.3)  may  adversely 
impact on potential economic growth and external 
competitiveness  in  the  medium  to  long-term. 
International 
investors  report  having  forgone 
investments in Bulgaria due to the difficulties with 
labour  supply  (World  Economic  Forum,  2016b). 
Furthermore,  relatively  high  labour  costs  in  the 
non-tradable  sectors  could  eventually  feed  into 
higher  costs  in  the  tradable  sector.  For  the  time 
being,  the  tradable  sector  is  still  protected  by 
strong productivity. 

Source: European Commission 

Graph 4.4.2:  ULC-based REER in Bulgaria and EU 

Source: European Commission 

Despite  moderate  gains 
in  market  shares, 
exports  are  vulnerable  to  sudden  shifts  in 
external demand. Export market shares have only 
moderately  improved  since  the  2009-2010  crisis. 
In  2015,  they  have  decreased  (see  Graph  4.4.3). 
Bulgaria’s  competitiveness  gains  in  several  of  the 
EU trading partners – Germany, Italy, Greece and 
France  –  are  trumped  by  their  low  dynamism 
(Graph 4.4.4). In other important markets, such as 
Belgium  and  Turkey,  both  competitiveness  and 
dynamism  are  a  source  of  concern (34).  These 

(34) Exports to Belgium in 2016 have also been affected by the 
temporary closure of a copper refinery plant in Belgium. 

36 

-10-505101520040506070809101112131415161718%changeInflation (GDP deflator growth)Real compensation per employeeProductivity contribution (negative sign)Nominal unit labour costULC in Euro Areaforecast708090100110120130140150160170180190080910111213141516*17*1999=100BGEA19EU28 
 
 
 
 
                                                           
4.4. Investment 

trends  make  export  performance  rather  dependent 
on external demand shifts. 

Graph 4.4.3:  Bulgaria’s Export Market Shares (EMS) 

Source: European Commission 

Graph 4.4.4:  Dynamism and Competitiveness of Exports 

(goods) on top-10 country destinations 

industries,  where  the  proportion  of  the  high  and 
medium/high  exports  represent  only  39 %  of  the 
total.  Challenges  in  the  business  environment, 
framework  and 
including  an  unstable 
corruption,  as  well  as  the  lack  of  highly  qualified 
staff continue to prevent Bulgaria from moving up 
the export quality ladder.  

legal 

4.4.2.  INVESTMENT DEVELOPMENTS 

The  crisis  increased  Bulgaria's  dependency  on 
public  investment.  Despite  an  overall  investment 
ratio above the EU average, private investment has 
been  declining  and  contracted  further  in  2015 
(Graph  4.4.5).  A  number  of  investment  barriers 
continue  to  constrain  a  tangible  contribution  of 
private  investment  to  economic  growth  (see  Box 
4.4.1). In contrast, public investment accelerated in 
2015  with  the  finalisation  of  the  2007-2013  EU 
funds  programming  period,  reaching  its  highest 
share  of  total  investment  post-crisis  (more  than 
double 
investment 
reduced  again  in  2016,  as  investment  under  the 
new  EU  funding  period  still  needs  to  gain 
momentum. 

the  EU  average).  Public 

Graph 4.4.5:  Public and private investment 

Source: European Commission 
Note: The size of the bubble indicates the weight of the 
destination in Bulgaria’s exports for 2016. Market dynamism 
stands for the difference between the annualized growth 
rates of World imports per market and global World imports. 
Competitiveness stands for the difference between the 
annualized growth rates of Bulgaria’s exports per market 
and World imports per market. 

Source: European Commission 

Despite  significant  improvements,  exports  of 
low-to-medium  quality  prevail.  While  the  share 
of  high  quality  exports  moderately  increased  to 
18 %  in  2010-2015,  low  quality  exports  still 
constitute  50 %  of  overall  exports,  according  to 
European  Commission  calculations.  The  same 
trend  is  found  in  the  technology  content  of 

Bulgaria performed well in the implementation 
of  EU  funds  during  the  previous  cycle.  The 
implementation  rate  under  the  EU  2007-2013 
programme  reached  95 %  in  2016,  the  highest 
among  regional  peers, 
together  with  Poland. 
According to the authorities, the implementation of 

37 

-30-20-1001020304000'01'02'03'04'05'06'07'0809101112131415Rate of ch.  y-o-y (%)Contribution: World export growth (neg. Sign)Contribution: Export growthEMS growth rateGermanyItalyTurkeyRomaniaGreeceFranceBelgiumUKChina-6-4-20246-15-10-5051015Market Dynamism (pp)Competitiveness (pp)0510152025303500010203040506070809101112131415161718% GDPPrivateGovernmentEU28 totalEU28 governmentForecast 
 
 
 
 
4.4. Investment 

the  2014-2020  programmes  is  on  track.  The  best 
prospects  are  in  transport,  environment,  labour 
market integration and social inclusion, education, 
and  public  administration  where  enough  mature 
projects  exist.  However,  there  are  still  some  risks 
of  interruption  of  financing  and  consequently  a 
loss of funds as a number of actions included in the 
ex-ante  conditionality  have  not  yet  been  fulfilled 
(see Box 2.1 in Section 2). 

section  4.4.3)  and  the  Vocational  Education  and 
Training  Act,  easing 
several  administrative 
procedures as well as reducing the connection time 
to the electricity grid. Delays in some other actions 
are a risk for their adoption and implementation. 

4.4.3.  BUSINESS ENVIRONMENT  

The public investment management system still 
lacks a long-term perspective and coordination. 
Despite  the  high  public  investment,  the  quality  of 
infrastructure remains relatively low (Graph 4.4.6). 
There  is  neither  a  long-term  plan  nor  a  list  of 
priorities,  especially  for 
the  non-EU  funded 
investment  projects.  In  most  cases,  the  project 
selection  is  done  ad-hoc  and  according  to  the 
government’s 
The 
municipalities 
investment 
their 
programmes, and there is no horizontal programme 
coordination or monitoring.  

priorities. 
own 

political 

run 

Graph 4.4.6:  Public investment and quality of infrastructure 

Source: European Commission and World Economic Forum: 
the Global Competitiveness Index 2015-2016. 

Ongoing  efforts  to  improve  the  investment 
environment are still subject to implementation 
risks.  In  2016,  the  government  adopted  an  action 
plan with legal, administrative and general actions 
to address the main obstacles to investments. Half 
of  all  actions  were  planned  for  2016.  Most  of  the 
actions  (about  62 %)  envisage  changes  in  the 
legislation.  The  executed  actions  so  far  include 
amendments to the Statutory Instruments Act (see 

in 

an 

rights, 

in  property 

improvement 

Corruption  and  weak 
institutions  remain 
among  the  top  business  environment  concerns. 
Despite 
the  Global 
competitiveness ranking in 2016 (World Economic 
Forum, 2016a), some areas continue to show little 
improvement.  "Institutions"  are  particularly  weak 
among  competitiveness  indicators,  driven  by  low 
intellectual 
performance 
property protection, judicial independence and the 
transparency of government policy-making (World 
Economic  Forum,  2016a.  See  also  Section  4.6.1). 
Corruption  is  judged  by  business  as  the  most 
problematic  factor,  followed  by  the  inadequately 
educated  workforce  (World  Economic  Forum, 
2016b.  See  also  Sections  4.3.3  and  4.6.3). 
According  to  the  Heritage  Foundation  (2016), 
economic freedom and governance indicators also 
continue  to  underperform.  In  the  2016  worldwide 
governance 
indicators  (World  Bank,  2016b), 
Bulgaria  ranks  among  the  weakest  in  the  EU  in 
terms of accountability, rule of law, and control of 
corruption (Graph 4.4.7). 

Graph 4.4.7:  Worldwide governance indicators 

Source: World Bank (2016a) 

The  stalled  structural  reforms  momentum  is 
further 
conditions. 
Bulgaria's  ranking  in  the  Doing  Business  Report  
worsened  in  2016  (World  Bank,  2016b).  The 

in  business 

reflected 

38 

ATBEBGHRCYCZDKEEFIFRDEGRHUIEITLVLTLUMTNLPLPTROSKSIESSEUK0123456234567Public GFCF spending,             2006-2015 average, % of GDPTransport infrastructure020406080100Voice &accountabilityPoliticalstabilityGovernmenteffectivenessRegulatoryqualityRule of lawControl ofcorruptionBulgariaEU-frontier 
 
 
4.4. Investment 

new 

also  developed  for  assessing  the  impact  on  SMEs 
of 
the 
legislation.  Depending 
implementation, these changes can contribute to a 
more  stable  and  predictable  legal  framework.  In 
addition,  the  capacity  of  the  administration  to 
prepare high-quality impact assessments represents 
a potential risk.  

on 

Moderate  progress  has  been  made  on  lowering 
the  administrative  burden.  The  Ministry  of 
Economy estimates  the  combined  annual  business 
savings from lowering the administrative burden at 
up to BGN 417mn (EUR 213mn). However, so far 
78 %  of  the  measures  from  the  first  and  second 
action  plans  have  been 
implemented  as  of 
December  2016  (European  Commission,  2016d). 
Furthermore, only about 54 % of actions under the 
third action plan had been accomplished at the end 
of 2016. 

The  business  environment  continues  to  be  less 
supportive  of  SMEs  than  in  the  EU (37).  Little 
progress  was  made  in  2016  in  implementing 
improving  key  policy 
relevant  measures  or 
of 
especially 
indicators, 
areas 
entrepreneurship, 
innovation, 
skills 
internationalisation, responsive administration, and 
public  procurement.  This  is  a  crucial  source  of 
concern  especially  given  the  high  contribution  of 
SMEs to employment and value added.  

the 
and 

in 

weakest  areas remain  connection  to  the  electricity 
grid  and  insolvency,  where  the  gap  to  the  best 
performing country is the largest in spite of minor 
the  Global 
(Graph  4.4.8). 
improvements 
competitiveness ranking (World Economic Forum, 
2016a), innovation and business sophistication are 
also  highlighted  as  persistently  hampering  the 
business environment. 

In 

Graph 4.4.8:  Doing Business 2017, distance to frontier 

Source: World Bank (2016b) 

organisations 

Poor  consumer  conditions  and  an  insufficient 
enforcement  of  EU  consumer  rules  persist. 
Consumers continue to have low trust in consumer 
protection 
public 
authorities and NGOs) and in redress mechanisms 
(35).  Strengthening  consumer  law  enforcement 
capacity could improve the business environment. 
These  problems  give  rise  to  unfair  commercial 
practices and to other illicit practices (36).  

(including 

The business environment and legal framework 
are  expected  to  benefit  from  improvements  in 
the  policy  making  process.  The  amendments  to 
the Statutory Instruments Act in 2016 introduced a 
compulsory ex-ante and ex-post impact assessment 
of  policy  proposals  and  increased  the  minimum 
period  for  public  consultation.  Guidelines  were 

(35) Consumers’ trust in redress mechanisms (28 % vs 47 % in 
EU28) is low and has only marginally increased (European 
Commission, 2017a). 

(36) The  proportion  of  consumers  reporting  unfair  commercial 
practices  and  other  illicit  practices  is  well  above  the  EU 
average.  The  same  is  true  for  the  percentage  of  retailers 
reporting  unfair  commercial  practices  by  competitors 
(European Commission, 2017a).  

(37) 2016 SBA Fact-sheet, Bulgaria. 

39 

020406080100Starting a businessDealing with constructionpermitsGetting electricityRegistering propertyGetting creditProtecting minority investorsPaying taxesTrading across bordersEnforcing contractsResolving insolvencyBG 2017BG 2016Best performing country 2017 
 
                                                           
                                                           
4.4. Investment 

40 

 Box 4.4.1: Investment challenges and reforms in BulgariaSection 1. Macroeconomic perspective  Since the crisis, the decline in overall investment has been sharper than in the EU average, mainly due to private investment. Until 2015, the decline in private investment was partly offset by higher public investment, as the absorption of EU structural funds had increased. The slow start of the 2014-2020 programming period for EU funds had a strong impact on public investment, but a gradual recovery is expected in 2017 (see Section 1). As a consequence, total investment is expected to slowly increase, in line with the EU average. However, high private sector indebtedness, despite the ongoing deleveraging process, subdued credit demand and only a gradually-decreasing high stock of non-performing loans limit banks’ capacity to boost credit and private investment (see Section 4.2.4). Although some steps have been taken, persistent weaknesses in the business environment continue to weigh negatively on investment and restrain the demand for credit (see Section 4.4.3 and European Commission, 2015b).  Section 2. Assessment of barriers to investment and ongoing reforms       Corruption and weak public institutions continue to hamper Bulgaria’s business environment. The regulatory and administrative burden remains high and obstructs business activities. Inefficiencies in public administration, the low quality of regulations, frequent changes to the legislation and slow enforcement due to lengthy proceedings weaken the effectiveness of Bulgaria’s legislation and deter investment (see Sections 4.4.3 and 4.6.2).  Skills shortages and mismatches weigh on investment. The quality of the education and training systems and their limited adequacy with regard to the labour market continues to hamper the supply of suitably-skilled workers, thus negatively impacting investment decisions (see Section 4.3.1).   Several weaknesses in the insolvency framework continue to hamper private investment. The insolvency framework is characterised by delays, complexity, high costs, low recovery rates and the tendency for restructuring cases to end in liquidation. While the government has acknowledged the need for overhauling the insolvency framework, there have been numerous delays. Besides the needed amendments to the Commercial Code and its implementation, the effectiveness of the insolvency framework also depends on improving the infrastructure of the judicial system (see Section 4.6.3). Table 1:Regulatory/ administrative burdenTaxationPublic administrationAccess to financePublic procurement /PPPsCSRCooperation btw academia, research and businessJudicial systemFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecomEducation CSREnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
 
 
 
 
 
4.4. Investment 

intermediaries have been approved under the SME 
window  of  the  European  Fund  for  Strategic 
Investments, the first pillar the Investment Plan for 
Europe,  which  should  mobilise  financing  of  EUR 
575m. A further EUR 408m of financing for SMEs 
can be mobilised by an agreement approved by the 
EIB  under 
the  Infrastructure  and  Innovation 
window.  

responsible 

The  very  nascent  business  start-up  system  is 
still 
largely  dependent  on  public  support. 
Venture  capital  and  business  angel  financing  for 
new  and  growing  firms  are  well  below  the  EU 
average.  In  July  2015,  the  government  set  up  a 
fund  manager 
financial 
instruments  co-financed  by  European  Structural 
and  Investment  Funds (so-called  Fund  of  Funds). 
However,  progress  was  slow  in  2016  with  no 
operational  results  so  far.  The  insufficient  public 
information  on  the  fund  manager’s  investment 
strategy and uncertainty over the planned financial 
product pipeline in 2016 further added to the risks 
surrounding the project. 

for  all 

infrastructure 

technology  by  businesses 

The  slow  uptake  of  digital  technology,  mainly 
due  to  low  digital  skills,  is  a  further  challenge. 
Bulgaria ranks among the EU’s lowest countries in 
the  2016,  with  a  very  weak  rate  in  digital  public 
services,  e-government  usage  and  integration  of 
digital 
(European 
Commission,  2016f).  Further  investment  in  fixed 
is  still 
and  mobile  broadband 
for  mobile 
hindered  despite  some  progress 
broadband 
(see  also  European  Commission, 
2015c).  Despite  recent  improvements,  consumers’ 
confidence  in  online  commerce  is  one  of  the 
lowest in the EU (European Commission, 2017b). 
The share of the population who ordered goods or 
services  over  the  internet  in  the  last  12  months  is 
less  than  one  third  of  the  EU28  average  (17 % vs 
55 %  EU28).  Only  5 %  of  Bulgarian  SMEs  sold 
in  2016  (17 %  for  EU28)  (European 
online 
Commission, 2016f). 

The 

entrepreneurship. 

Bulgaria continues to underperform in the field 
of 
Global 
Entrepreneurship  Monitor  Report  for  Bulgaria 
(GEM,  2016)  highlighted  the  many  challenges 
faced  by  entrepreneurs  (Graph  4.4.9)  (38).  To 
tackle  the  gaps  in  the  business  ecosystem,  the 
government 
'Entrepreneurship 
Bulgaria 2020' plan at the end of 2015. In 2016, it 
introduced an entrepreneurship module in all levels 
of  education,  though  the  quality  remains  to  be 
seen.  In  addition,  the  ongoing  reform  of  the 
insolvency framework (see Section 4.6.3) is crucial 
for  enabling  a  restructuring  and  fresh  start  of 
bankrupt entrepreneurs. 

adopted 

the 

Graph 4.4.9:  Global Entrepreneurship Monitor 

A: total early-stage entrepreneurial activity 
B: established business ownership rate  
C: perceived opportunities  
D: perceived capabilities  
E: Entrepreneurial intention  
F: fear of failure 

Source: GEM (2016), GEM Country profiles 
Note: The data for LT* is for 2014 and for CZ** for 2013. 

The EU SME initiative and the Investment Plan 
for  Europe  will  increase  funding  for  SMEs. 
Access  to  finance  continues  to  be  a  challenge  for 
SMEs.  The  EU  SME  initiative,  operational  since 
2016,  is  expected  to  mobilise  about EUR  600  mn 
for  Bulgaria’s  SMEs  through  commercial  banks. 
The  instrument  is  managed  by  the  European 
Investment Fund and co-financed by the European 
Structural  and  Investment  Funds,  the  European 
Commission (through its Horizon 2020 funds), and 
the  European  Investment  Bank  Group.  Adding  to 
this,  ten  agreements  with  Bulgarian  financial 

(38) Another constraining factor is the lack of national rules for 
companies wishing to directly transfer registered offices on 
a cross-border basis. 

41 

0102030405060ABCDEFBGHRSIEEHULVPLROSKCZ**LT* 
 
 
                                                           
 
4.4. Investment 

42 

 Box 4.4.2: Selected highlights – Bulgaria’s use of the Investment Plan for EuropeBulgaria has shown a promising participation in the actions made available under the Investment Plan for Europe. Bulgaria ranks second among EU member states in terms of expected investment under the Investment Plan relative to GDP.  It has been particularly successful in the uptake of financial instruments that support SME access to finance under the European Fund for Strategic Investments (EFSI). As of 15 December 2016, ten agreements with Bulgarian financial intermediaries have been approved under the EFSI SME window. The expected mobilised investment is EUR 575 million, based on a contribution of EUR 54 million from the European Investment Fund (EIF). SMEs are showing a strong interest for the financing made available at improved conditions thanks to the support of EFSI. For instance, the EIF has been over-delivering under the first EFSI/COSME agreement in Bulgaria (signed in October 2015), as the portfolio of SME loans already exceeds 75% of the planned size.     Besides the SME window, financing has been also made available under the Infrastructure and Innovation window. The European Investment Bank (EIB) and the Bulgarian Development Bank (BDB) signed the first agreement in November to provide funding under the Infrastructure and Innovation window. This agreement is expected to generate EUR 420 million of investments. The EIB has provided a EUR 150m loan to the BDB to on-lend, directly or through partner banks, to SMEs and mid-caps in Bulgaria.  A Memorandum of Understanding (MoU) to establish an Advisory Platform to strengthen support to local project promoters has been also recently signed. The EIB and the Bulgarian authorities signed the MoU in December 2016 under the framework of the European Investment Advisory Hub (EIAH). The platform, which would be the first one supported by EIAH at Member State level, is planned to be established by end-March 2017. The platform aims to support project promoters in the identification, preparation, structuring and implementation of strategic projects. In particular, the focus will be on SMEs and mid-caps to address companies’ difficulties in scaling up and supporting their access to relevant financial instruments. Finally, Bulgarian promoters have also been active users of the European Investment Project Portal (EIPP) with seven projects already published as of end-2016.  
 
 
 
 
 
4.5. SECTORAL POLICIES 

4.5.1.  RESEARCH, DEVELOPMENT AND 

INNOVATION  

Low  technological  progress  and  innovation 
performance  limit  Bulgaria’s  growth  potential. 
Bulgaria is a modest innovator with an innovation 
performance  at  only  46 %  of  the  EU  average 
(European  Commission,  2016g).  The  main 
weaknesses  are  in  the  areas  of  'linkages  and 
entrepreneurship',  'open,  excellent  and  attractive 
research  systems'  and 
'finance  and  support'. 
Despite  stronger  results  in  community  trademarks 
and  designs,  patent  applications  are  low,  which 
could  be  partly  explained  with  the  insufficient 
cooperation between businesses and academia (see 
below).  

The  research  and  innovation  (R&I)  system 
remains ineffective. The R&I system suffers from 
weak  long-term  financial  commitment,  inefficient 
governance  structures,  inadequate  incentives  for 
high-quality research, a lack of effective policies to 
strengthen  research-business  cooperation,  and  a 
weak  human  resources  base.  As  a  result,  it  does 
not  create  the  necessary  framework  conditions  to 
stimulate 
in  business  R&D  and 
innovation.   

investments 

to  ensure 

investments  and 

There are still a number of shortcomings in the 
financing  of  R&I.  Identified  inefficiencies  (39) 
include the need to establish a long-lasting support 
for  R&I 
the 
independent,  robust  and  coordinated  management 
of  national  and  European  R&I  funding  (40).  A 
rapid  alignment  with  international  peer  review 
standards  to  guarantee  an  adequate  evaluation  of 
R&I  projects  and  performance-based  institutional 
funding  would  also  help  improve  the  efficiency 
and  impact  of  public  R&I  funding.  Support  for 
firms  that  perform  R&D&I  through  a  wider  and 
adequately funded portfolio of instruments (41) and 
the  deployment  of  ESIF  funds  are  indispensable 
for improving the innovation landscape.  

(39) The authorities requested an evaluation of the R&I system 
using  the  Horizon  2020  Policy  Support  Facility  (PSF).  A 
report  with 
operational 
policy  messages 
recommendations  was  published 
in  October  2015 
(European Commission, 2015d). 

and 

(40) An  effective  governance  mechanism  between 

the 
Ministries  and  R&I  stakeholders  through  the  activation  of 
the Smart Growth Council would support this goal. 

(41) Including  innovation  vouchers,  "proof  of  concept"  funds 

and science-business mobility schemes. 

The  low  level  of  R&D  investment  hampers 
competitiveness. Investment in R&D increased by 
more  than  21.5 %  in  2015  to  0.96 %  of  GDP. 
However,  it  is  still  well  below  the  national  target 
of  1.5 %  of  GDP.  Higher  business  R&D 
(representing  73 %  of  total  R&D  expenditure) 
explains most of the growth based on preliminary 
data  from  the  National  Statistical  Institute  (NSI). 
Foreign companies are the largest sources of funds 
for business R&D (Graph 4.5.1) (42). 

Graph 4.5.1:  R&D expenditure (GERD) by sector of 

performance and source of funds, 2014 

Source: European Commission 

Universities'  R&D  funding  is  the  lowest  in  the 
EU.  Preliminary  data  from  the  NSI  points  to  a 
further  decline  of  0.02  pp.  in  2015,  to  0.05 %  of 
GDP. Business investment in the higher education 
R&D  sector  is  low,  which  suggests  insufficient 
interest for cooperation (43). 

limited  by 

The impact of ESIF and the development of the 
science  base  are 
structural 
weaknesses in the R&I system. Policy initiatives 
such  as  the  updated  National  Strategy  for  the 
Development  of  Scientific  Research  and  changes 
to the Law on the Promotion of Scientific Research 
systemic 
do  not 

sufficiently 

address 

the 

(42) The sectors with the largest business R&D investments are 
technical  activities, 
the  professional,  scientific  and 
reflecting 
foreign 
investments 
companies, and manufacturing. However, R&D investment 
in manufacturing is lower than in any other EU country. 
(43) The  Global  Competitiveness  Report  2016-2017  ranks 
Bulgaria  74th  out  of  138  countries  in  university-industry 
collaboration in R&D (World Economic Forum, 2016a). 

in  clinical 

trials  by 

43 

0.000.050.100.150.200.250.300.350.40Businessenterprise sectorGovernmentsectorHigher educationsectorBusiness enterprise sectorGovernment sectorAbroad 
 
                                                           
 
                                                           
4.5. Sectoral policies 

(see  Section  1,  Graph  1.9).  In  addition,  the 
economic  performance  of  SOEs  combined  with 
frequent changes in their board membership, often 
based on unclear rules, point to overall weak SOE 
corporate governance. 

shortcomings of R&I. Key bottlenecks remain: (i) 
poor  administrative  capacity  and 
insufficient 
reliance on performance-based funding allocation; 
(ii) the fragmentation of the R&I system and lack 
of systematic  dialogue  and  incentives  for  stronger 
cooperation  between  academia, 
research  and 
business;  (iii)  the  lack  of  a  comprehensive  update 
of  the  research  infrastructure  mapping  with  a 
systematic  prioritisation;  and  (iv)  the  lack  of 
synergies with the smart specialisation process. 

4.5.2.  ENERGY AND CLIMATE ACTION 

of 

strategic 

state-owned 

The  authorities’  efforts  to  reform  the  energy 
sector  are  showing  some  tangible  results.  The 
independence  of  the  State  Energy  and  Water 
Regulatory  Commission  was  reinforced  through 
amendments  to  the  Energy  Bill.  The  financial 
energy 
stability 
the 
enterprises  (SOEs)  was  strengthened  by 
payment  of  arrears  and  the  setting  up  of  an 
Electricity System Security Fund. A more market-
based approach towards renewables, the setting up 
the  Independent 
of  a  day-ahead  segment 
Bulgarian  Energy  Exchange  (IBEX)  and 
the 
preparatory steps for opening of the retail segment 
to competition are welcomed. In addition, Bulgaria 
has participated actively in the Central Eastern and 
South Eastern Gas Connectivity (CESEC) regional 
initiative.  Finally, 
link 
between  Bulgaria  and  Romania  was  launched  in 
November 2016.  

inter-system  gas 

the 

in 

However,  reforms  in  the  electricity  sector  are 
still incomplete and may have possible negative 
fiscal  impacts.  The  State  Energy  and  Water 
lacks  adequate 
Regulatory  Commission  still 
financial  and  human  resources.  The  fact  that  the 
Bulgarian  Energy  Holding  (BEH)  owns 
the 
Independent  Bulgarian  Energy  Exchange  (IBEX) 
raises doubts about possible conflicts of interest. 

The low profitability and resource efficiency of 
energy  SOEs  poses  potential  financial  stability 
and fiscal risks. The majority of these SOEs have 
been  underperforming  private  sector  competitors 
(IMF, 2016). Energy SOEs are accumulating debt, 
while mainly relying on transfers from the central 
for 
budget  or  on 
international 
access.  This 
capital  market 
contributes to corporate indebtedness in the energy 
sector and poses potential contingent liability risks 

implicit  state  guarantees 

44 

 
4.6. PUBLIC ADMINISTRATION 

4.6.1.  PUBLIC ADMINISTRATION  

and 

The  public  administration  reforms  have  yet  to 
provide  the  much-needed  boost  for  a  more 
sector.  Ambitious  public 
efficient  public 
administration 
e-government  measures, 
including legal initiatives adopted in the course of 
2016, have so far had only a limited impact on the 
efficiency  of  public  institutions.  Implementation 
has  been  slow  and  fragmented.  For  instance,  the 
introduction 
integrated 
shared 
administrative  services  has  been  delayed.  This 
calls  for  an  accelerated  and  more  systematic 
implementation, 
efficient 
including 
enforcement and comprehensive monitoring. 

and 

an 

of 

The  reform  momentum  in  e-government  has 
slowed down. A state agency was created in 2016 
to  speed  up  the  introduction  of  e-government  and 
improve  coordination.  However,  to  become  fully 
operational,  adequate  expertise  and  resources  are 
still  missing.  The  priority  projects  announced  for 
2016  in  the  e-government  roadmap  have  been 
delayed.  Their 
require 
stronger  political  support.  Progress  has  been 
achieved in the area of open data with the adoption 
of the legal framework and the publication of over 
1500  datasets,  which  reflects  Bulgaria’s  good  EU 
ranking  for  its  data  portal  maturity  (European 
Commission, 2016h).  

implementation  may 

Ongoing reforms in the civil service continue to 
be  hampered  by  several  shortcomings.  As  a 
welcome step, recent legislative amendments allow 
for  the  centralisation  of  the  first  step  of  the 
recruitment  process  of  all  civil  servants 
in 
compulsory  competitions.  Still, 
the  current 
proposals for the performance-based remuneration 
and  career  development 
system  could  be 
streamlined and improved. 

Corruption  continues  to  constitute  a  major 
challenge. The institutional mechanisms to address 
this  challenge  remain  fragmented  and  largely 
ineffective.  In  2015,  the  authorities  presented  an 
ambitious  strategy  in  the  fight  against  corruption. 
However, implementation is still in its early stages. 
Among  the  key  measures,  the  strategy  envisaged 
the  establishment  of  a  unified  anti-corruption 
agency to investigate conflicts of interest and illicit 
enrichment.  However,  the  government’s  proposal 
for  the  necessary  legislative  changes  has  not 
passed the parliamentary stage. In terms of judicial 

follow-up 
to  corruption  allegations,  Bulgaria 
continues  to  show  a  weak  track  record  regarding 
corruption  cases  leading  to  final  convictions  in 
court (European Commission, 2017b). 

4.6.2.  PUBLIC PROCUREMENT 

Despite  some  improvements,  there  are  still 
deficiencies  in  the  public  procurement  system. 
The procurement publication rate is higher than the 
EU  average.  However,  the  fact  that  the  lowest 
price is often the only selection criteria (in around 
64 %  of  the  awarded  tenders  in  2016)  might  give 
less  room  for  fostering  quality  and  innovation  in 
the 
transparent 
negotiated procedure without prior publication of a 
contract notice is also used more often than the EU 
average  (European  Commission,  2016h),  while 
cooperative procurement is applied in only 2 % of 
the tenders. 

selected  projects.  The 

less 

in 
Bulgaria  has  performed  relatively  well 
transposing 
procurement 
the  European 
legislation.  The  transposition  of  two  2014  EU 
directives  into  a  law  on  public  procurement  has 
enhanced legal certainty. Secondary legislation has 
been enacted, and a guidance handbook on the law 
and secondary legislation has been prepared. Some 
standardised 
tender  documents  and  contract 
clauses have been prepared. 

Work  to  strengthen  the  capacity  of  the  Public 
Procurement  Agency  and 
the  contracting 
authorities  is  ongoing.  The  authorities  plan  to 
enhance  the  capacity  of  the  Public  Procurement 
Agency  (PPA),  including  by  increasing  staff.  The 
newly created Methodological Council is expected 
to  help  establish  coherent  guidance  and  control 
practices  of  public  procurement  rules.  Training  to 
enhance the professionalization of the PPA and the 
contracting authorities is conducted by the Institute 
for Public Administration. 

A new ex-ante control system was introduced in 
September  2016.  The  shift  to  risk  and  random-
based  ex-ante  controls  could  increase  ownership 
from  contracting  authorities  while  allowing  the 
PPA  to  improve  the  quality  of  its  controls.  The 
effectiveness  of  the  new  system  remains  to  be 
proven. 

45 

 
 
4.6. Public administration 

While  cooperative  public  procurement  has 
shown positive results, some challenges remain. 
The  introduction  of  e-procurement  in  the  Central 
purchasing body (CPB) for the state administration 
is  a  welcome  development.  At  the  same  time  the 
progress  with 
cooperative 
procurement  and  the  CPB  in  the  health  sector  is 
still limited. 

the  municipal 

A  sound 
legislative 
implementation  of  the 
amendments  adopted  in  2016  should  have  a 
positive  impact  on  the  judicial  system.  The 
adopted amendments to the Constitution and to the 
Judicial  Systems  Act  constitute  a  significant 
further  step  in  the  reform  of  the  judiciary. 
However, as these reforms have been implemented 
only recently, it is too early to assess their impact. 

The  insolvency  framework  continues  to  be 
hampered by several weaknesses. The ineffective 
insolvency  framework  is  a  contributing  factor  to 
sector 
the 
indebtedness (see Section 4.2.4). The framework is 
characterised  by  high  complexity,  lengthy  and 
costly procedures, and a low recovery rate.  

deleveraging 

private 

slow 

of 

The  authorities  have  sought  to  reform  the 
insolvency  system  since  2015  but  progress  has 
been slow. This reform includes introducing a fast-
track  court  approval  procedure  for  pre-agreed 
restructuring  agreements,  introducing  a  sound 
framework  that  provides  for  out-of-court  debt 
restructuring  and  preventive  procedures,  ensuring 
the 
interconnectivity  between  courts  and 
the 
insolvency  register,  improving  the  data  quality  of 
the trade register, and improving the supervision of 
auditing companies. In addition, improving judges’ 
capacity  to  handle  insolvency  cases  could  be 
beneficial.  Progress,  however,  has  been  slow. 
Amendments  to  the  Commercial  Act  and  the 
Pledge  Registry  have  only 
recently  been 
adopted (44).  Their  effectiveness  remains  to  be 
assessed.  A  new  law  on  supervising  financial 
auditing  companies  has  been  submitted 
to 
Parliament but has not yet been adopted.  

The  procurement  appeal  system  is  crucial  for 
the  effective  implementation  of  public  funds. 
The assessment of the procurement appeal system 
identifies  some  areas  for  improvement (Public 
Procurement Agency et al, 2016). Putting in place 
appropriate  measures  to  address  the  remaining 
shortcomings  is  important  to  ensure  the  effective 
the 
use  of  both  national  budget  funds  and 
European  Structural  and  Investment  Funds  during 
the current 2014-2020 programming period. 

Public  procurement  remains  one  of  the  sectors 
most at risk of corruption. This can raise the cost 
and  compromise  the  quality  of  public  services. 
Such  risks  affect  both  smaller  local  contracts  and 
larger  public  works  such  as  road  construction.  In 
2015, nearly 60 per cent of businesses in Bulgaria 
(the  highest  percentage  in  any  Member  State) 
considered  that  corruption  had  prevented  them 
from winning a public tender within the last three 
years (European Commission, 2015e). 

4.6.3.   JUDICIAL SYSTEM AND INSOLVENCY 

FRAMEWORK 

Despite  welcome  progress,  there  are  still  a 
number  of  weaknesses  in  the  judicial  system. 
An  effective  national  justice  system,  including 
independent  judges,  is  important  to  make  the 
country’s  business  environment  more  investor-
friendly.  The  quality  and  the  independence  of  the 
judiciary  remain  of  concern.  The  perceived 
independence  of  the  judiciary  remains  one  of  the 
lowest  in  the EU (European Commission, 2017c). 
In addition, heavy workload and resulting delays in 
court  proceedings  appear  to  be  a  continuing 
challenge  in  some  courts,  especially  those  in  the 
capital city. A number of reforms are in progress to 
improve  efficiency.  In  addition,  the  government 
aims  to  enhance  the  infrastructure  of  the  judicial 
system including by upgrading the court document 
management system.  

(44) State Gazette No 105/30.12.2016 

46 

 
                                                           
ANNEX A 

Overview table 

2016 country-specific recommendations (CSRs) 

Commitments                                                           Summary assessment (45) 

  CSR  1:  Achieve  an  annual  fiscal  adjustment  of 
0.5 %  of  GDP 
the  medium-term 
towards 
budgetary objective in 2016 and in 2017. Further 
improve  tax  collection  and  take  measures  to 
reduce  the  extent  of  the  informal  economy, 
including undeclared work. 

  Achieve  an  annual  fiscal  adjustment  of  0.5 %  of 
the  medium-term  budgetary 

towards 

GDP 
objective in 2016 and in 2017.  

  Further improve tax collection and take measures 
to  reduce  the  extent  of  the  informal  economy, 
including undeclared work.  

Bulgaria has made some progress in addressing 
CSR1  (this  overall  assessment  of  CSR  1  does 
not  include  an  assessment  of  compliance  with 
the Stability and Growth Pact). 

The assessment of compliance with the Stability 
and  Growth  Pact  will  be  made  in  spring  when 
final data for 2016 will be available. 

for 

costs. 

improving 

compliance 

the  SNS  and 

  Some  progress  in  improving  tax  collection 
and  reducing  the  extent  of  the  informal 
economy.  The  government  adopted 
in 
October  2015  the  Single  National  Strategy 
(SNS)  2015-2017 
tax 
collection, tackling the shadow economy and 
reducing 
The 
its 
implementation  of 
accompanying  action  plan  is  ongoing  with 
some  of  the  measures  already  in  place. 
Additional  measures  such  as  risk  based 
controls  on  enterprises  and  enhanced 
controls on products subject to excise duties 
are  also  being  implemented.  Tax  revenue  is 
increasing  and  part  of  this  increase  can  be 
attributed  to  improved  collection,  but  the 
size  of  the  shadow  economy  remains  high. 
To  tackle  undeclared  work  the  authorities 
have  increased  labour  inspections  but  more 

(45) The following categories are used to assess progress in implementing the 2016 country-specific recommendations (CSR): 
No  progress:  The  Member State  has  not  credibly  announced  nor adopted  any  measures  to  address  the  CSR.  Below  a  number  of 
non-exhaustive typical situations that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 

•  no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  Parliament/relevant  parliamentary  committees,  the  European  Commission,  or  announced  in 
public (e.g. in a press statement, information on government's website);  
• no non-legislative acts have been presented by the governing or legislator body; 
•  the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
• announced certain measures but these only address the CSR to a limited extent;  
and/or 
• presented legislative acts in the governing or legislator body but these have not been adopted yet and substantial non-legislative 

further work is needed before the CSR will be implemented;  

• presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or  
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial 
decision; but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

47 

 
 
                                                           
 
 
A. Overview table 

  CSR  2:  By  the  end  of  2016,  finalise  the  asset 
quality review and stress test of the banks. By the 
end  of  2016,  complete  the  balance-sheet  review 
and stress test of the insurance companies and the 
review  of  private  pension  funds'  assets.  Take,  as 
necessary,  follow-up  actions  in  all  three  sectors 
and  continue  to  improve  banking  and  non-
banking supervision. 

  By  the  end  of  2016,  finalise  the  asset  quality 

review and stress test of the banks.  

  By  the  end  of  2016,  complete  the  balance-sheet 
review and stress test of the insurance companies 
and the review of private pension funds' assets.  

effort seems to be needed in this area. 

Bulgaria has made some progress in addressing 
CSR2. 

  Some progress in finalising the asset quality 
review  and  stress  test  of  the  banks.  The 
results  of  the  review  and  stress  tests  were 
published  but  the  degree  of  independence 
and the nature of the stress tests did not fully 
comply with the recommendation. 

  Substantial  progress  in  completing  the 
balance-sheet  review  and  stress  test  of  the 
insurance  companies  and  the  review  of 
private  pension  funds'  assets.  The  reviews 
to  a  high  degree  of 
were  completed 
independence 
transparency.  Some 
issues,  including  valuing  illiquid  financial 
instruments  and  assets  as  well  as  related-
party transactions, were not fully tackled.  

and 

  Limited  progress  in  taking,  as  necessary, 
follow-up  actions  in  all  three  financial 
sectors  and  in  improving  banking  and  non-
banking  supervision.  The  two  supervisors 
have issued follow-up actions resulting from 
the  reviews  and  stress  tests.  Those  actions 
remain  to  be  implemented.  The  BNB's 
action  plan  on  banking  supervision  is  being 
implemented  albeit  with  delays  in  some 
important  areas.  The  IMF/WB  review  is 
ongoing.  Non-bank  supervision  remains  to 
be 
issues 
improved  by 
highlighted by the reviews. 

tackling 

the 

Bulgaria has made limited progress addressing 
CSR3. 

  Take, as necessary, follow-up actions in all three 
sectors and continue to improve banking and non-
banking supervision. 

  CSR 3: Reinforce and integrate social assistance, 
including  relevant  social  services,  and  active 
labour market policies, in particular for the long-
term  unemployed  and  young  people  not  in 
employment,  education  or  training.  Increase  the 
provision  of  quality  education  for  disadvantaged 
groups,  including  Roma.  Improve  the  efficiency 
of  the  health  system  by  improving  access  and 
funding,  and  health  outcomes.  In  consultation 
with  social  partners  establish  guidelines  and 
criteria  for  setting  the  minimum  wage.  Increase 
the  coverage  and  adequacy  of  the  minimum 

48 

 
 
 
 
 
 
 
 
 
 
 
 
A. Overview table 

income scheme.  

  Reinforce 

and 

social 

integrate 

assistance, 
including  relevant  social  services,  and  active 
labour market policies, in particular for the long-
term  unemployed  and  young  people  not  in 
employment, education or training.  

 

Increase  the  provision  of  quality  education  for 
disadvantaged groups, including Roma.  

49 

  Some  progress 

to 

is  a 

there 

reinforcing 

and 
in 
including 
social  assistance, 
integrating 
relevant  social  services,  and  active  labour 
market  policies,  in  particular  for  the  long-
term  unemployed  and  young  people  not  in 
employment, education or training. Bulgaria 
initiated  a  pilot  project 
introduce 
integrated  Centres  for  Employment  and 
Social  Assistance  and  plans  to  add  8  new 
centres  in  remote  areas  to  the  existing  65. 
Many  unemployed  have  already  been 
serviced  by  these  centres.  The  working 
methods  between  the  Employment  Agency 
and  Agency  for  Social  Assistance  have 
limited 
improved.  However, 
provision  of  social  services  to  support  the 
long term unemployed taking a job, as local 
municipalities  –  the  main  social  services 
providers  –  have  not  been  involved.  Efforts 
to  address  the  high  percentage  of  young 
people  not  in  employment,  education  or 
training  have  started  yielding  results  as  the 
implementation  of  the  Youth  Guarantee  is 
speeding 
employment 
indicators  are  still  worrying.  There  are 
several  projects  at  national  level  based  on 
the plans of municipalities and funded by the 
European  Social  Fund  which  aim  at 
providing  integrated  services  for  Roma, 
migrants  and  the  disadvantaged,  including 
employment,  education,  housing  and  social 
services. Many of those in target groups are 
long term unemployed.  

up.  However 

  Limited  progress 

of 

in 
quality 

increasing 
education 

the 
for 
provision 
disadvantaged  groups, 
including  Roma. 
Despite  budgetary  increases,  ensuring  the 
necessary funding for the ongoing reform is 
a  challenge  and  the  financial  standard  has 
not  yet  been  adopted.  School  performance 
indicators  and  the  methodology  for  funding 
to  be 
based  on  performance  have  yet 
The 
banning 
developed. 
segregated 
same 
classes  within 
school/kindergarten  needs  to  be  properly 
implemented  and  monitored,  but  such 
mechanisms  remain  weak.  Following  the 
entry into force of the new School Education 
Act  in  August  2016,  a  new  education 

provision 

the 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Improve  the  efficiency  of  the  health  system  by 
improving  access  and 
funding,  and  health 
outcomes.  

 

In  consultation  with  social  partners  establish 
guidelines  and  criteria  for  setting  the  minimum 
wage.  

 

Increase  the  coverage  and  adequacy  of  the 
minimum income scheme.  

A. Overview table 

standard  will 
intercultural 
focus 
education  (46)  and  will  be  implemented  for 
the first time this school year.  

on 

  Limited  progress 

in 

improving 

the 
efficiency of the health system by improving 
access  and  funding,  and  health  outcomes. 
Most  measures  concerning  pharmaceutical 
pricing  which  aim  at  reducing  costs  of 
medicines  are  not  expected  to  go  into  force 
until  the  beginning  of  2017  at  the  earliest. 
Others  like  contracting  of  hospital  services 
based  on  the  National  Health  Map  are 
implemented  only  partially  –  contracts  for 
hospitals until April 2017 were set based on 
historical  data.  A  significant  part  of  the 
population remains without health insurance 
coverage. 

  Limited progress in establishing guidelines 
and  criteria  for  setting  the  minimum  wage. 
Progress  on  devising  a  minimum  wage 
setting  mechanism  is  also  limited;  there 
seems  to  be  general  agreement  among  the 
government  and  social  partners  on  the  way 
forward, however this still needs to be put in 
practice. 

irrespective  of 

  Limited progress in increasing the coverage 
and  adequacy  of  the  minimum  income 
scheme.  It  is  now  possible  to  apply  for 
benefits 
the  place  of 
residence.  Earnings  from  one  day  and  dual 
education  contracts  will  be  excluded  from 
the  means  testing.  Heating  benefits  for  the 
2016/2017  winter  season  were  marginally 
increased.  However,  the  extent  of  measures 
the  coverage  and 
planned 
adequacy  of  the  minimum  income  scheme 
does  not  correspond  to  the  magnitude  of 
poverty in the country and do not allow the 
benefits  to  keep  their  safety  net  function 
over time. 

increase 

to 

  CSR  4:  Reform  the  insolvency  framework  to 
accelerate recovery and resolution procedures and 
improve  their  effectiveness  and  transparency. 
Increase  the  capacity  of  the  courts  regarding 

Bulgaria has made limited progress addressing 
CSR 4. 

(46) The  adopted  standard  is  less  ambitious  than  initially  planned  as  it  includes  'Civic,  health,  environment  and  intercultural 
education'  but  it  is  still  a  step  forward  to  a  more  inclusive  and  innovative  methods  of  education.  The  programme  is  to  be 
adopted  by  the  schools  depending  on  their  needs.  Center  Amalipe  has  shared  their  experience  in  this  respect  and  published 
guidance for schools on how to plan activities in this respect.  

50 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                           
A. Overview table 

insolvency procedures. Strengthen the capacity of 
the  Public  Procurement  Agency  and  contracting 
authorities and improve the design and control of 
public tendering procedures, in particular by fully 
implementing 
the 
development  of  the  Public  Procurement  Sector 
(2014-2020).  Speed  up  the  introduction  of  e-
procurement. 

the  National  Strategy  for 

  Reform  the  insolvency  framework  to  accelerate 
recovery  and  resolution  procedures  and  improve 
their  effectiveness  and  transparency.  Increase  the 
insolvency 
the  courts  regarding 
capacity  of 
procedures.  

  Strengthen the capacity of the Public Procurement 
Agency  and  contracting  authorities  and  improve 
the  design  and  control  of  public 
tendering 
procedures,  in  particular  by  fully  implementing 
the  National  Strategy  for  the  development  of  the 
Public Procurement Sector (2014-2020). Speed up 
the introduction of e-procurement. 

51 

  Limited  progress 

in 

their 

reforming 

increasing 

effectiveness 

the 
insolvency framework to accelerate recovery 
resolution  procedures  as  well  as 
and 
improving 
and 
the 
transparency  as  well  as 
capacity  of  the  courts  regarding  insolvency 
procedures. The insolvency reform effort has 
been  slow  despite  the  high  level  of  private 
sector debt and mediocre performance of the 
insolvency 
framework. 
proceedings 
Improvement  efforts  in  the  legislative  as 
well as judicial framework do not match the 
size  of  the  problem.  According  to  the 
assessment  of  the  Commission,  beyond  the 
proper  implementation  of  the  announced 
initiatives,  further  steps  are  needed, 
in 
system. 
the 
particular 
Amendments  to  the  Commerce  Act  and  the 
Pledge  Registry  have  only  recently  been 
adopted. They will need to be complemented 
with  improvements  in  the  infrastructure  of 
the judicial system and in judges’ capacity to 
handle insolvency cases. 

judicial 

in 

the 

introduction  of 

  Some progress in strengthening the capacity 
of  the  Public  Procurement  Agency  and 
contracting  authorities  and  improving  the 
design  and  control  of  public  tendering 
procedures  […]  and  limited  progress  in 
e-
speeding  up 
procurement.  A  number  of  actions  have 
already  been  undertaken  by  the  Bulgarian 
government. However, the majority of them 
stage  of 
an 
is 
implementation,  so 
their  practical 
effects  still  need  to  be  seen  and  assessed. 
The  authorities  have  only  started 
the 
tendering  process  for  the  e-procurement 
system. 

currently 

early 

that 

at 

 
 
 
 
 
 
 
 
 
 
 
 
 
A. Overview table 

Europe 2020 (national targets and progress) 

Employment rate target: 76 % 

67.1 % in 2015. 

Early school leaving target: 11 % 

13.4 % in 2015. 

Tertiary education target: 36 % 

32.1 % in 2015. 

At  risk  of  poverty  target  in  numbers  of  persons: 
Decrease by 260 000 (baseline 2008: 1 632 000) 

1 586 000 in 2015. 

Greenhouse gas (GHG) emissions target: 

2020 target: 20 % 

20 % in 2020 compared to 2005 (in non-ETS sectors)  

According  to  the  latest  national  projections 
submitted  to  the  Commission  and  taking  into 
account  existing  measures,  it  is  expected  that 
the  target  will  be  achieved:  -5.5 %  in  2020  as 
compared  with  2005  (by  a  margin  of  25 
percentage points).  

Non-ETS 2015 target: 14 % 

Based  on  proxy  data,  the  non-ETS  greenhouse 
gas  emissions  between  2005  and  2015 
decreased  by  -3 %;  which  means  17pps  below 
the  2015  target  set  by  the  Effort  Sharing 
Decision.  

2020 Renewable energy share target: 16 % 

Target achieved. 

Energy efficiency indicative national target: 

16.9 Mtoe in primary energy consumption 

8.6 Mtoe in final energy consumption 

In  2015,  the  renewable  energy  share  stood  at 
18.4 %, up from 18 % in 2014 (47). 

Indicative  national  target  not  yet  achieved. 
Bulgaria needs to increase its effort to decrease 
its primary and final energy consumption. 

In  2015  primary  energy  consumption  stood  at 
17.9 Mtoe, 4% up from 17.2 Mtoe in 2014. 

In  2015  final  energy  consumption  stood  at  9.5 
Mtoe, 6% up from 9.0 Mtoe in 2014. 

R&D target: 1.5 % of GDP 

0.96 % (2015) 

(47) Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable  Energy, 

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
http://ec.europa.eu/energy/en/studies 

52 

 
 
 
 
 
                                                           
A. Overview table 

Limited  progress  towards  the  target:  R&D 
intensity  increased  from  0.79 %  of  GDP  in 
2014  to  0.96 %  in  2015,  among  the  lowest  in 
the EU. The increase in R&D intensity is driven 
by business (investments by foreign companies 
in  R&D  services,  and  clinical 
in 
particular),  while  public  R&D  intensity  (in  the 
in  particular)  has 
higher  education  sector 
decreased.  In  2015  R&D  intensity  in  Bulgaria 
was composed of 0.25 % public R&D intensity, 
0.7%  business  R&D  intensity,  and  0.01 % 
private non-profit R&D expenditure. 

trials 

53 

 
 
 
 
 
ANNEX B 

MIP Scoreboard 

Table B.1:  MIP scoreboard indicators 

1) Unemployment rate: for 2010 i = Eurostat back-calculation to include 2011 Population Census results. 2) Youth 
unemployment rate: for 2010 i = Eurostat back-calculation to include 2011 Population Census result 
Source: European Commission; IMF 

54 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-10.7-3.2-0.70.30.20.6-35%-91.9-82.8-77.9-73.3-75.2-60.0Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% 9.71.9-4.0-1.0-2.8-4.1Export market share - % of world exports5 years % change-6%8.311.6-0.30.66.012.8Nominal unit labour cost index (2010=100)3 years % change9% & 12% 29.517.712.2p15.6p18.0p14.9p6%-12.3p-8.7p-5.3p0.4p1.5p1.6bp14%3.71.43.07.2-1.1-0.3133%132.5124.2125.0131.9123.6110.560%15.315.216.717.027.026.0Unemployment rate3 year average10%7.6i9.511.312.212.211.216.5%-5.45.410.24.35.67.0-0.2%0.4b-1.9b-0.11.73.12.20.5%0.73.43.92.70.6-1.22%7.8i13.113.06.5-1.2-6.5Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
ANNEX C 

Standard Tables 

Table C.1: 

Financial market indicators 

1) Latest data Q2 2016. 
2) Quarterly values are not annualised 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators) 

55 

201120122013201420152016Total assets of the banking sector (% of GDP)102.1108.2112.9110.8107.3108.7Share of assets of the five largest banks (% of total assets)52.650.449.955.057.6-Foreign ownership of banking system (% of total assets)75.073.069.675.575.4-Financial soundness indicators:1)              - non-performing loans (% of total loans)19.719.818.614.413.012.3              - capital adequacy ratio (%)17.616.617.021.521.622.2              - return on equity (%)2)4.74.74.47.28.07.0Bank loans to the private sector (year-on-year % change)3.83.51.12.2-0.33.1Lending for house purchase (year-on-year % change)1.31.0-0.8-1.7-0.72.3Loan to deposit ratio107.6102.494.186.077.575.3Central Bank liquidity as % of liabilities0.00.00.00.00.00.0Private debt (% of GDP)124.2125.0131.9123.6110.5-Gross external debt (% of GDP)1) - public6.78.38.114.112.314.2    - private66.266.165.965.454.052.3Long-term interest rate spread versus Bund (basis points)*274.8300.3190.3218.4199.6223.9Credit default swap spreads for sovereign securities (5-year)*248.6227.7102.1119.4153.8139.0 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Labour market and social indicators 

1 Unemployed persons are all those who were not employed but had actively sought work and were ready to begin working 
immediately or within 2 weeks.       
2 Long-term unemployed are peoples who have been unemployed for at least 12 months.       
3 Not in education employment or training.       
4 Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.       
Source: European Commission (EU Labour Force Survey). 

56 

Table II. Labour market and social indicators201120122013201420152016 4Employment rate(% of population aged 20-64)62.963.063.565.167.167.7Employment growth (% change from previous year)-2.2-2.5-0.40.40.40.6Employment rate of women(% of female population aged 20-64)59.860.260.762.063.864.1Employment rate of men (% of male population aged 20-64)66.065.866.468.170.471.2Employment rate of older workers (% of population aged 55-64)44.645.747.450.053.054.4Part-time employment (% of total employment, aged 15-64)2.22.22.52.52.21.9Fixed-term employment (% of employees with a fixed term contract, aged 15-64)4.04.45.65.34.44.2Transitions from temporary to permanent employment38.640.924.529.233.1:Unemployment rate1 (% active population, age group 15-74)11.312.313.011.49.27.8Long-term unemployment rate2 (% of labour force)6.36.87.46.95.64.7Youth unemployment rate (% active population aged 15-24)25.028.128.423.821.617.8Youth NEET3 rate (% of population aged 15-24)21.821.521.620.219.3:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)11.812.512.512.913.4:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)27.326.929.430.932.1: 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and social indicators (continued) 

1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
2 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.        
3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.       
4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.       
5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 
(2007 survey refers to 2006 incomes)   
Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.      

57 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare4,04,24,24,44,9:Disability1,31,21,21,41,4:Old age and survivors8,58,08,08,68,9:Family/children1,91,71,71,81,9:Unemployment0,60,60,60,50,5:Housing0,00,00,00,00,0:Social exclusion n.e.c.0,30,20,20,30,3:Total16,515,916,016,917,9:of which: means-tested benefits0,70,70,70,70,8:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)49,249,149,348,040,141,3Children at risk of poverty or social exclusion  (% of people aged 0-17)49,851,852,351,545,243,7At-risk-of-poverty  rate2 (% of total population)20,722,221,221,021,822,0Severe material deprivation rate3  (% of total population)45,743,644,143,033,134,2Proportion of people living in low work intensity households4 (% of people aged 0-59)8,011,012,513,012,111,6In-work at-risk-of-poverty rate (% of persons employed)7,78,27,47,29,27,7Impact of social transfers (excluding pensions) on reducing poverty23,619,018,121,320,122,5Poverty thresholds, expressed in national currency at constant prices5286926902553254928752941Gross disposable income (households; growth %)0,66,61,22,5-7,21,4Inequality of income distribution (S80/S20 income quintile share ratio)5,96,56,16,66,87,1GINI coefficient before taxes and transfers46,546,347,047,749,750,2GINI coefficient after taxes and transfers33,334,933,635,435,437,0 
 
 
 
 
 
C. Standard Tables 

Table C.4: 

Product market performance and policy indicators 

1 The methodologies, including the assumptions, for this indicator are shown in detail at: 
http://www.doingbusiness.org/methodology.        
2 Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or don't know.       
3 Percentage population aged 15-64 having completed tertiary education.       
4 Percentage population aged 20-24 having attained at least upper secondary education.       
5 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
6 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

58 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry5.517.613.064.950.692.28Labour productivity in construction0.989.130.265.05-2.430.35Labour productivity in market services8.553.910.212.061.073.63Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry6.68-2.422.581.536.150.66ULC in construction4.02-2.033.332.0912.324.57ULC in market services0.794.759.942.515.673.33Business environment201020112012201320142015Time needed to enforce contracts1 (days)564.0564.0564.0564.0564.0564.0Time needed to start a business1 (days)25.025.025.025.025.025.0Outcome of applications by SMEs for bank loans2na0.59na0.860.970.54Research and innovation201020112012201320142015R&D intensity0.560.530.600.630.790.96Total public expenditure on education as % of GDP, for all levels of education combined4.103.823.684.27nanaNumber of science & technology people employed as % of total employment282829313233Population having completed tertiary education3202021222424Young people with upper secondary education4868786868685Trade balance of high technology products as % of GDPnana-3.50na-2.56-2.38Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallnana1.57OECD PMR5, retailnana0.20OECD PMR5, professional servicesnananaOECD PMR5, network industries6nana2.45 
 
 
 
 
C. Standard Tables 

Table C.5:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices)  
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)  
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
          Waste intensity: waste (in kg) divided by GDP (in EUR)  
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP    
Weighting of energy in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP  
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)  
Real unit energy cost: real energy costs as a percentage of total value added for the economy  
Environmental taxes over labour taxes and GDP: from European Commission's database, ‘Taxation trends in the European 
Union’  
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)   
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors  
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP  
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.  
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste  
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP  
Proportion of greenhouse gas (GHG) emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on 
greenhouse gas emissions (excl land use, land use change and forestry) as reported by Member States to the European 
Environment Agency 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR)  
Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels  
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.  
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels  
Source: European Commission; * European Commission and European Environment Agency 

59 

 
 
 
 
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